20th March 2018

Throw the book at them

MARKET CLOSE:
iTraxx Main S29

58.7bp

iTraxx X-Over S29

285.4bp

10 Yr Bund

0.58%, +1bp

iBoxx Corp IG

B+103.75bp, +1bp

iBoxx Corp HY

B+320.7bp, +2.5bp

10 Yr US T-Bond

2.88%, +3.5bp

FTSE 100 , DAX , S&P 500 ,

Facebook sullies the mood…

The big Facebook-driven drop in US equities on Monday put a dampener on Tuesday’s session. We were left treading water as we attempted to take stock of the damage caused. With the FOMC up next, it’s a nailed on certainty to be a another very quiet session on Wednesday.

Good news in the day saw UK consumer price inflation fall by more than expected to 2.7% in February year-on-year, while the US import tariffs on steel dampened business sentiment in Germany and the ZEW index fell by more than anticipated to 5.1 in February from 18.8 in January.

Into all that, the credit market was occupied by the iTraxx index roll into Series 29 (used to always be an exciting moment, but isn’t any more), which went smoothly and according to expectations (Main Series 29 around +7.5bp and X-Over Series 29 around +32.5bp, versus Series 28).

In the credit market, it gave us another chance to absorb the recent heavy levels of non-financials issuance and reflect some more on where the market is at the moment. Monday’s IG non-financial supply approaching €3bn was high and deals were not anymore than 2x subscribed, and more in the 1.2-1.5x area.

It also meant that several borrowers didn’t get to reduce the final pricing versus the initial guidance level. So, for sure, that means we had some indigestion and we could have done with those deals from Monday coming later in the week. We would think now that nothing much gets done on Wednesday with the FOMC excuse enough for all and sundry to stay sidelined.

As for the secondary market, spreads have leaked wider for the best part of a couple of weeks now, where the Markit iBoxx IG cash index now resides at B+104bp. That means we are at the highest level since last October 2017, or 7bp wider this year for this index and 22bp wider than the record low we reached in early February. As for returns, IG credit is sitting on losses of just 0.5% so far this year which isn’t too bad given the Jan/Feb severe back up in rate markets – and compares very favourably as to the rollercoaster ride European stock markets have dealt up this opening quarter.

The high yield market, on the other hand, has barely gained much of a footing this year in which to launch a sustained tightening trend, and secondary has been an unconvincing market as a result. Valuations have been deemed too rich for too long, and so adding risk has almost entirely been through the primary market. The HY iBoxx index is now at B+321bp and the widest levels since June 2017. The index is 62bp wider than the record tight and 34bp wider this year. Returns, though, are -0.25% helped in part by the anchoring of the front end of the rates curve for this shorter duration asset class.

It’s worth mentioning that the IG sterling corporate bond market iBoxx index is 14bp wider YTD but total returns year to date are at -1.85% (longer duration market). There hasn’t been much by way of  issuance in primary this year with just a smattering of deals, so the weakness has effectively mirrored that of IG and returns under pressure because of the technical dynamic of the Gilt market.


Primary effectively shuts

€750m Senior deal for Santander UK Group

We can’t be too surprised that primary activity dwindled markedly. The only non-financial borrower in the market was Finnish telecommunications group DNA Oyj – and it was a rarity. It’s not often we have an IG-rated non-financial borrower from Finland. As it happens, the group printed a €250m 7-year deal at midswaps+72bp, which was 13bp inside the initial talk off a €460m subscribed book.

The other deal of note was a senior Santander UK Group issue, for €750m in a 6NC5 floating structure priced at Euribor+85bp. The total senior issuance for the month rises to €17.6bn with this deal, as can be seen in the chart, below.

Senior Financials Monthly Supply

Credit spreads still leaking wider

The Facebook probe continued and promises to be in the headlines for a while. After almost a 7% decline on Monday, the group’s stock was lower again on Tuesday (around -5% at the time of writing). Elsewhere, we did manage to stage bit of a recovery following those falls in Monday’s session in Europe. In the US, stocks were dipping in and out of the red in a tentative session.

Rates didn’t gain any safe-haven bid. In fact, we moved weaker pretty much everywhere. So yields were on the rise. The 10-year Gilt yield rose to 1.48% (+3.5bp) but that lower-than-expected consumer inflation print will give this week’s MPC gathering a bit of food for thought. There’s enough time between now and May – when the market expects a rate hike, for the data to suggest otherwise that any action is needed. The Bund yield to 0.58% (+1bp) in the same maturity while US Treasuries in the 10-year were yielding 2.88% (+3.5bp).

For credit, the early focus was on the iTraxx index roll. Main closed at 58.7bp and X-Over at 285.7bp which a little wider versus the opening roll level for Main and 3bp tighter for X-Over.

As for the cash market, the IG market was taking some time out to absorb the deal flow of late, but we did edge wider for choice. The iBoxx IG cash index was left at B+103.75bp (+1bp). The CoCo index moved 5bp wider to B+371bp and this index is now 7bp wider year to date – and a massive 90bp wider than the record tight level seen in early February. Returns though are still positive year to date!

Finally, in the HY market, we endured another dull secondary session, and we edged wider with the index left at B+320.7bp (+2.5bp).

Have a good day.


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Suki Mann

A 30+ 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 CreditMarketDaily.com.