13th June 2019

Time for a breather

MARKET CLOSE:
iTraxx Main

61.2bp, +0.5bp

iTraxx X-Over

272.7bp, +1.9bp

🇩🇪 10 Yr Bund

-0.245%, -1bp

iBoxx Corp IG

B+136bp, -0.4bp

iBoxx Corp HY

B+449bp, unchanged 

🇺🇸 10 Yr US T-Bond

2.11%, -2bp

🇬🇧 FTSE 100

7156.83, (-0.44%)
🇩🇪 DAX

13035.24, (-4.01%)
🇺🇸 S&P 500

3225.89, (-3.60%)

Markets anticipating central bank action…

As we approach the halfway point for the month, the markets have steadied, albeit comforted knowing that a dose of policy easing is likely coming, and are therefore willing to let the numerous difficult macro/geopolitical developing situations pass. For the moment. Equities generally tread water and government bonds are stable to better bid. Stable/tightening credit spreads add to an overall decline in funding costs for corporates, representing a boon for primary market issuance. It’s where all the action is.

Borrowers have not been holding back this week and we had the third session in a row greet a grateful investor with a flurry of new deals.

The news flow was probably less about macro, but more on the continued disturbances in Hong Kong and the suspected attacks on oil tankers in the Gulf of Oman. The latter pushed oil prices higher. On the macro front, industrial output across the Eurozone which declined in April by 0.5% versus March which itself was revised lower to -0.4% (from -0.3%). Year on year, it’s -0.4%.

Mario shouldn’t drag his heels as auto sector weakness bites

The region’s economy is mired in a slowdown where the important auto sector (car production down 4.1% in April) is slowing hard and dragging on activity everywhere. Tools in his box he might have, but Draghi is going to need to use them quickly because the manufacturing sector (and not just for exports) is feeling the pinch.

The markets reacted with equities rising a little, having been in the red into the data release, on expectations that rate cuts or other policy responses are coming. It gave a bit of a boost to risk assets, investors knowing that the sick patient is being prepped for another dose of medicine.

Rate markets, as suggested earlier, did very little. Credit was probably better bid for choice, amid little secondary market activity because the focus was on that plethora of primary deals.

Each new data release is now pointing to GDP growth expectations for the Eurozone likely going to be revised lower again. They are also firming up the case for the ECB needing to respond soon, where the new TLTRO is going to fall short in providing the required boost.

Bond yields are going nowhere but lower, credit spreads will probably manage some upside and fixed income total returns look set to rise. The AT1 market might be sitting on 8% year to date and IG credit some 4.5% but the Eurozone sovereign market (iBoxx index) has returned 4.6%, with 1% of it coming this month!


It’s raining deals

Primary markets again offered up a welter of bond offerings across most of the different corporate and SSA markets, in what was the busiest session of the week.

IG non-financial corporates came in the form of Vattenfall which issued €500m in a green bond at midswaps+55bp for a 7-year maturity. The books were close to €4bn and final pricing 25bp inside the opening gambit. Swedish industrial investment group Investor AB printed €500m in a 20-year at midswaps+75bp with books of €1.5bn and final pricing 20bp inside the initial price talk.

Air Liquide was next with an increased €600m in an 11-year maturity priced at midswaps+38bp, which was 32bp inside the opening guidance. The book was up at €2.5bn. The fourth IG non-financial borrower in the session was Australian telecoms group Optus which issued €500m in a 10-year at midswaps+80bp (-15bp versus IPT), off a book of €1.3bn. Last but not least was PSA Banque’s €500m, 5-year at midswaps+90bp, priced 30bp inside the opening mumble. Books were 5x subscribed.

IG Issuance

Senior financials were a little less prevalent than in Wednesday’s session, but we still had several deals. Commerzbank issued €500m in a 7-year senior non-preferred deal priced at midswaps+120bp which was 20bp inside the opening price chat and books were in excess of €1.3bn. UBI Banca also went for senior non-preferred funding with €500m in a 5-year at midswaps+290bp (-15bp versus IPT, books around €1bn). Finally to the fore was Jyske Bank with €500m in non-preferred debt in a 5NC4 structure at midswaps+95bp (-15bp versus IPT).

In the high yield market, European Energy A/S priced €140m of a long 4-year maturity green bond at Euribor+535bp and Italian pharmaceutical group Doc Generici is due to price €470m in a 7NC1 deal at Euribor+387.5bp-400bp.

Senior financial issuance this month comes in at €11bn (from 12 borrowers) versus €5.5bn for the whole of June last year. IG non-financial issuance has climbed to €17.8bn with the current run rate at pitching us at €35bn for the full month – which if we reach that level, would be the best June in the last 6 years. For the year to date, €145bn of IG non-financial debt has been issued and, adjusting for seasonality (lower issuance in July/August/December), we’re on track for €250bn for the full year.

Elsewhere, insurer Chubb lifted €1.15bn in an equally split offering (8-year, 12-year) and UK real estate group SELP (SERGO PLC) issued €500m in a 7.5-year at midswaps+150bp.

The day’s sovereign deals came from Iceland issuing €500m in a 5-year at midswaps+28bp (books €2.4bn) and Ukraine, which took a sizeable €1bn in a 7-year at a yield of 6.75% (books at €5.5bn). Yield, it seems, washes away many concerns.


Going with the flow

The attack on the two oil tankers in the Gulf of Oman put an abrupt end to the drop in oil prices which had previously been under considerable pressure following the big inventory build ups in the US. They added around 3% in Brent and WTI per barrel.

Equities, for the most part, were undeterred but faded gains into the close. European stocks had risen by up to 0.5% earlier in the day before closing mixed. The Dax outperformed rising by 0.45%. US equities were having a choppier time of it but were higher by up to 0.4%, as at the time of writing.

It looks like it really will happen

Duration markets saw the 10-year benchmark Bund yield edge lower to 0.245% (-1bp) and the 10-year Treasury yield edged to 2.11% (-2bp). Boris Johnson emerged (as expected) a clear winner in the first round of the Conservative party election ballot and probably served to heighten ‘no-deal’ dynamics leaving Gilts better bid and the 10-year yield down at 0.84% (-3bp).

In the synthetic market, iTraxx Main edged a touch higher to 61.7bp (+0.5bp) and X-Over was similarly very slightly higher at 272.7bp (+1.9bp).

The IG market was better bid for choice leaving the iBoxx index a touch tighter at B+136bp with the focus of investor clearly elsewhere, and the high yield market was unchanged leaving the iBoxx index at B+449bp.

Have a good day.

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.