17th April 2019

Got to be happy with that

iTraxx Main

57.9bp, -0.1bp

iTraxx X-Over

248.1bp, -1bp

🇩🇪 10 Yr Bund

0.08%, +1bp

iBoxx Corp IG

B+126.7bp, -1bp

iBoxx Corp HY

B+389.5bp, -3bp

🇺🇸 10 Yr US T-Bond

2.58%, -1bp

🇬🇧 FTSE 100

7457.02, (-0.58%)
🇩🇪 DAX

13789.00, (+0.79%)
🇺🇸 S&P 500

3386.15, (+0.61%)

A restful Easter indeed…

So we’re about to close up for the long Easter weekend with all markets showing some fantastic results. Those GDP numbers from China will give us some fuel, allowing risk assets to continue to rally for a bit longer. Markets are not going to fall out of bed just yet. There’s a good chance that the S&P sees a fresh record high soon. That 10-year Bund yield looks like it won’t see -0.20% anytime soon either as growth hopes start to take hold again.

A happy Easter break is ensured

Euro-denominated IG credit spreads (iBoxx index) at B+127bp (-46bp this year already) might actually see B+110bp or lower before 2019 is out. All we need is fear (that it could all come crashing down), hope (that we might be seeing global growth underpinned by those Chinese stimulus measures) and a lot of luck (that event risk remains well off the radar). It looks like we will see out April having clocked up some good performance.

Interestingly, primary has slowed markedly over the past week, but we have still managed to churn deals out. Those deals have largely come unopposed and the demand for them has remained at very high levels. 3-4x has been the default oversubscription, but we have seen 10x subscriptions for some issues too. Higher-yielding, rare/infrequent inaugural borrowers have been the chief beneficiaries of the high end of the oversubscription which has seen final pricing ratchet tighter versus the initial (and usually) very cheap guidance.

Performance on the break has been good too. It helps the market overall that issues are tightening and have done so in around 90% of cases this year. That boosts general confidence for borrowers and investors alike and keeps the wheels well-oiled, allowing for more primary as secondary spreads tighten. It is just what we are seeing this year, obviously helped along by the inflows into corporate bond funds as investors shifted away or diverted from cash, rates and/or equities.

Investors looking for capital preservation strategies and a bit of extra yield has been a boon for the corporate bond market. As well as that IG performance, we have highlighted on many occasions the performance in higher beta markets, too. It would appear that the low-hanging fruit has not yet been picked there. We have far to go before we get close to the levels seen in the 2017 ECB corporate QE period.

In high yield, the index tightened to a record B+254bp in Nov 2017, to B+81bp in February 2018 for IG and the AT1 index saw a record tight of B+287bp in January 2018. We currently reside at B+390bp (HY), B+127bp (IG) and B+533bp (CoCo) for the aforementioned indices. And without some central bank assistance, that is, absent a marginal buyer we are unlikely going to test those tights again.

Still, as mentioned above, B+110bp on the IG index isn’t out of reach, perhaps B+330-350bp for high yield isn’t too. For the CoCo index, somewhere in the low 400s could be reached. We need to stars to remain aligned driven ultimately by that Goldilocks macro environment.

Financials dominate in primary

The deals in senior financials which dominated in the session came from Bank of Nova Scotia which printed €1bn in a 5-year at midswaps+43bp (-17bp versus IPT). The deal was followed by Wells Fargo which lifted €1bn also in a 5-year maturity at midswaps+48bp (and also -17bp versus IPT).

In sterling, the Co-op Bank funded £200m in a subordinated 10NC5 T2 issue costing them a nice 9.5%! In the sterling non-financial corporate sector, Next Group issued £250m in a long 6-year at G+205bp, off a £1.7bn book.

Swedish real estate group SBB issued €300m in a PerpNC5.25 hybrid, rated in the high yield category, costing 4.875% which was 25bp inside the opening guidance. Europcar was the other high-yield borrower present, with €450m in the bag in a 7NC3 structure priced at 4% (-37.5bp inside IPT).

Snoozing ahead of the Easter break

The wind-down into Easter sees us finish for the week in Thursday’s session but it felt like that was already the case. On Wednesday, we closed with little really happening and that left global equities mixed. European stocks were up as much as 0.5% (Dax outperforming) while, at the time of writing, US equities were a small up or down depending on the index.

Rates were pretty much doing the same, with the US Treasury yielding 2.58% in the 10-year and the equivalent Bund at 0.08% (+1bp). Gilts closed to yield 1.24% in the 10-year.

The synthetic iTraxx indices closed unchanged to slightly better offered (touch lower) with Main at 57.9bp (-0.1bp) and X-Over left at 248.1bp (-1bp), in a lacklustre session.

The cash market was similarly playing out, amid the lightest of flows and liquidity. Still, we squeezed on, and the Markit iBoxx cash index closed at B+126.7bp (-1bp). The AT1 market closed unchanged. The sterling corporate market closed a touch better too, the index left at G+155bp (-0.4bp) which is 10bp tighter this month and 35bp tighter this year giving its a healthy total return to date of 4.2%!

Finally, the high yield market had those deals in the session to keep participants busy because little else was happening – so they were much welcomed, and secondary still managed a squeeze. The index managed to close at B+389.5bp (-3bp again).

Have a restful Easter, we’re back on Tuesday next week.

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.