18th January 2017

The Empire strikes back

MARKET CLOSE:
FTSE 100
7,219, -109
DAX
11,546, -9
S&P 500
2,268, -7
iTraxx Main
69.75bp, +0.75bp
iTraxx X-Over Index
291bp, +2bp
10 Yr Bund
0.31%, -1bp
iBoxx Corp IG
B+137bp, +1bp 
iBoxx Corp HY Index
B+391.5bp, +1.5bp
10 Yr US T-Bond
2.33%, -5bp

Prime Minister May has her day…

May’s day: The Prime Minister gave Brussels a fair offer

Be it the dollar or sterling – we’re hanging onto every speech or leak emerging from President-elect Trump and Prime Minister May. The moves are so short-term that it’s just easier to sit back and watch as traders in those FX markets play out their game to the headlines.

There were plenty of them in yesterday’s session. Small or large swings – usually large intraday gains or losses they incite. While we have an eye on those moves, we’re not inactive in the credit world. The bond market was a haven of activity but the focus in the non-financial corporate sector was on Fresenius which spilled out a 4-tranche multi billion euro deal that was lapped up. It comes as absolutely no surprise given the group has long been a darling of the corporate bond investor – whether the acquisitive company was rated junk or, like it is now, low investment grade. There were other deals, but the German-based healthcare group’s offering dominated.

May’s long-awaited Brexit speech was the most important event on the macro front and dominated the headlines around it.

The weaker pound post the Brexit vote made for annual UK consumer price inflation shooting through the roof in December to 1.6% (and a 2-year high). Sterling, though, had a super day after PM May gave a somewhat pragmatic and upbeat expectation of the UK’s stance on Brexit, surging almost 3% versus the dollar and 1.75% against the euro.

Generally though, we think that the Bank of England will tolerate the higher inflation numbers given that they need growth levels to be assured before any notion of a rate increase is entertained. The Gilt market didn’t really react and the 10-year yield was left at 1.31% (unchanged) although there was a very small amount of pressure on the front end.

May’s looking for a fresh deal with the EU, and nothing like what other non-EU/EEA area countries have. We’re going it alone with something new, bespoke and tailored to favour both the EU and the UK. It was a bold speech and certainly the Prime Minister didn’t undersell herself – she might just pull it off. For once, the signals from EU leaders were conciliatory, but the UK’s domestic opposition leaders were all pretty much scathing.


Others fading the Trump rally

Sterling “May” have had its day, but the Trump rally is looking like it is being faded by the market. As well as the weakness in the US dollar, US Treasuries got a decent bid behind them with the 10-year yield down at 2.34% (-4bp), and US stocks were down after the markets reopened following the Martin Luther King holiday.

The NY Empire manufacturing index rose less than expected in January. In Europe, the FTSE lost 1% as sterling strength gathered steam, while other bourses managed only small losses or gains.

Italy is being beaten again by the EU Commission which is expecting more measures from the beleaguered country in order that they tackle the budget deficit. Already under pressure from a broken banking system and an interim government, there’s nothing counter-cyclical from the rigidity of the enforcement of the Maastricht rules from the EU elite.

BTP yields were unchanged in the session at 1.91% (10-year). That was in line with other markets, with the 10-year Bund yield at 0.32% (unchanged), for example.


Primary has something for everyone

Big: 4-tranche €2.6bn deal from the German health care company

The Fresenius 4-tranche €2.6bn deal was a resounding success. The deals were massively oversubscribed and pricing tightened from the initial guidance by 23-25bp for the three €700m tranches (5, 7 and 10-year) and by 15bp for the 15-year maturity €500m deal.

The total order book for the deals came in at around €12.5bn with interest skewed towards the front end where the two shorter-dated tranches garnered books which were around 6-7x subscribed. Hence the opportunity for the syndicates desks to ram the pricing tighter, through a fairly illiquid secondary curve. Still, investors will be happy to have got their allocation, and can keep their counsel about the price for another day.

The day’s other deal in IG non-financials came from Scania as the group issued a short dated €500m floater – and even this deal was 5x oversubscribed. Thames Water issued 3250m in a 15-year sterling deal. In the high yield market, Smurfit Kappa raised €500m in a 7-year non-call deal. DVB Bank issued €500m in the senior bank space (with €1.9bn also from China Development Bank), while Groupama issued a 10-year maturity €650m Tier 2, 6% yielding deal.


Secondary sidelined, but weaker

But the secondary market saw weakness – either not being able to decouple from equity weakness or the high level of issuance we’re seeing in primary. Or both.

The day’s €3.1bn of IG non-financial issuance took the month-to-date issuance to €17.9bn. As we suggested in yesterday’s comment, the ECB’s near €2bn of weekly lifts are – strangely – having little impact on valuations in secondary. Something’s amiss, as the demand for corporate risk is not being reflected in the secondary market.

The Markit IG corporate bond index closed up at B+137bp (+1bp) and is at the highest level we have seen since we started the new year a couple of weeks ago.

The high yield market was a beacon of stability. Spreads generally were unchanged amid the barest of flows. The iBoxx index closed up a touch at B+391.5bp (+1.5bp) and the move represented noise in the big picture. The synthetic indices have held relatively firm in the past few sessions amid the volatility and weakness in stocks. iTraxx Main closed at 69.75bp (+0.75bp) and X-Over a little higher too, at 291bp (+2bp).

With May’s big speech done, we’re now into thinking about the ECB meeting. Back tomorrow.

Suki Mann

A 25-year veteran of the European corporate bond markets and in his role as Credit Strategist, Dr Mann has been ranked number one in the Euromoney Investor Survey eight times in ten years. Previously with Societe Generale and UBS, he now shares views of events in the corporate bond market exclusively here on Credit Market Daily.