12th April 2018

The Tweeter and the Porky Pie

MARKET CLOSE:
iTraxx Main

56.0bp, -1.4bp

iTraxx X-Over

279.6bp, -5.2bp

10 Yr Bund

0.51%, +1.5bp

iBoxx Corp IG

B+105.7bp, -0.7bp

iBoxx Corp HY

B+320.8bp, -5bp

10 Yr US T-Bond

2.83%, +4bp

FTSE 100

,
DAX

,
S&P 500

,

Geopolitical tensions ease…

It’s just as well that we have no clue what’s going on because it seems like the US administration doesn’t either. Having readied us all for an imminent attack on Syria, Trump’s latest tweet pulled back on his earlier threat. The back channels are open and busy while Theresa May was busy consulting her cabinet regarding joining the US (and others) in a concerted strike. Markets were initially unchanged as if to expect some immediate action while the more conciliatory tone of the latest tweet saw a sense of relief and a small rally. Nevertheless, we think there will be some action, but we would think that it will probably emerge after the close of business on Friday and over the weekend.

If there is military action the hope is that it will be short-lived, very targeted, effective and focused. We might then be in good shape to push on with a focus more squarely based on the macro situation. Unfortunately, macro doesn’t read too well, with February’s release of the Eurozone industrial production numbers recording a 0.8% decline versus January and broadly in line with other surveys throughout the first quarter suggesting a marked slowdown in activity in the region.

That means we’re still in some kind of a Goldilocks economic environment, suggesting rate markets ought to be anchored at around these levels (for yields), policy will stay unchanged when the ECB next meets in under two weeks’ time, and credit ought to be slightly better bid.

Still, credit is still extremely inactive in secondary which is about normal for this market, with primary doing all the heavy lifting in terms of getting investors involved in the market. Thursday’s session knocked out a few deals in primary and the first high yield borrowers were in the market following an absence of – amazingly – some three weeks! If the markets can stay relatively calm over the next couple of weeks, we are anticipating a steady stream of high yield deals, given what we know about the size of the pipeline.


High yield primary roars back

The high yield deals took in three borrowers with four issues. Indra Systems (unrated) issued €300m in a 6-year maturity costing 3.25%. Vallourec upsized to €400m for a 2.5-year maturity offering priced to yield 6.375% and we had a dual tranche offering from Novafives SAS. They took €325m in a 7NC3 at 5% and paid €+450bp for €275m in a 7NC1 floating structure. That’s €1.3bn for the day – and the month so far (better late than never), taking the total year to date to €20.3bn.

In the IG non-financial corporate market, we had Spanish based builder ACS back after an almost three year absence, with an increased €750m green bond deal at midswaps+120bp (-10bp versus IPT, books 2x). Acquisition financing (for the Gemalto deal, $5.6bn) had Thales in for €500m in a 2-year floater at €+10bp and a further €500m in a 6-year maturity at midswaps+37bp (-13bp versus IPT) generating combined order books of €3bn. Car parking and urban mobility group Infra Park issued an increased €700m in a refinancing deal, in a 10-year maturity at midswaps+83bp which was 17bp inside the opening guidance, off a book at over €1.6bn.

That takes the daily IG issuance to €2.45bn and the total for the month so far as we approach the halfway stage to €10.55bn. Given the levels of event risk at the moment, the volatility and likelihood that we get odd days of zero supply, €30bn for the month looks like a tough target to achieve. For the year so far, we are at €65.6bn which is the lowest run rate for at least 5 years.

IG Issuance

The lone senior financial deal came from NIBC Bank in a 5-year €500m effort at midswaps+78bp. Other noteworthy transactions came from Clarion Funding in sterling (£250m in a 30-year maturity), Deutsche Pfandbriefbank issued  €300m CoCo to yield 5.25% and Montenegro printed €500m in a year deal (3.635% yield).


And risk appetite returns

Trump is playing on the market’s nerves, with his latest tweet denying he suggested imminent military action. He has form, lots of it. The market is hanging on to his every tweet. So in Thursday’s session, it was rally time into the relief that the worst of any strike might be avoided. The Dax put on 1%, US markets were again up by 1% or more (at the time of writing) and almost flat year to date. Volatility was also dropping with the Vix at 19% (-1). Even Bitcoin made a comeback!

Into that risk asset rally, rate markets were giving some back. Yields rose, with the benchmark 10-year US Treasury yielding 2.83% (+4bp), the Bund added 1.5bp to yield 0.51% while the 10-year Gilt yield rose to 1.45% (+5bp).

Credit indices also rallied, as we might have expected, and iTraxx Main moved 1.4bp lower to 56bp with X-Over dropping through 280bp to 279.6bp (-5.2bp).

The cash market was quiet in terms of flow and volumes, but obviously was always going to be marked a little tighter. The Markit iBoxx cash index edged 0.7bp tighter to B+105.7bp – which is the tightest level in three weeks. In high yield, we had a similar picture, the index left at B+320.8bp (-5bp). High yield returns are flat year to date by the way.  Not bad going!

Have a good day.


For the latest on corporate bonds from financial news sources, click here.

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.