11th June 2019

Touchy-feely

MARKET CLOSE:
iTraxx Main

60.4bp, -0.7bp

iTraxx X-Over

267.5bp, -3.6bp

🇩🇪 10 Yr Bund

-0.23%, -1bp

iBoxx Corp IG

B+136.2bp, -1.3bp

iBoxx Corp HY

B+447bp, -5bp

🇺🇸 10 Yr US T-Bond

2.14%, unchanged

🇬🇧 FTSE 100 6090.04, (-1.55%) 🇩🇪 DAX 12901.34, (-0.71%) 🇺🇸 S&P 500 3372.85, (+0.12%)

Trying to look on the bright side…

It turned out to be a touchy-feely session leaving us thinking that we are just waiting for the next crisis point. Last week there was a sense of it being all over (again) as we rapidly approached 2.00% and -0.30% yields on the 10-year US Treasury and Bund, respectively.

After the Whitsun break, we were back in the saddle and enjoying bit of a rally in risk assets, in Europe anyway. The S&P index faded after a good start but is still less than 3% from a fresh record high. Rate markets were more stable and seemed not to be buying into any upside (by selling off), while credit is back in rally mode – the AT1 market sitting on total returns of 8% year to date.

The difficult macro outlook, the US/China trade war, domestic UK politics and Brexit are all still with us but they are known unknowns, and thereby for the moment don’t quite have a shock impact effect on markets. We do have the non-trivial probability for a US rate cut in our back pocket to help save the day, if need be (likely will be).

The rapid resolution to the Mexico/US trade dispute and the prospect of Chinese stimulus helped to alter the mood. June proper, therefore, has kicked-off with deals galore in credit primary and a rammed pipeline promising many transactions to come. We’ve got a packed programme ahead of us and it would appear that the month is going to be a heavy one in primary as borrowers probably look to get deals away before the summer lull (mid-July onwards?).

A choppy opening period for the month, though, has already seen IG non-financial issuance exceed €10bn and we must be looking at a level in excess of €25bn for June. As well as several non-financial offerings, the session was flush with senior bank debt transactions and the high yield market also had transactions to look at.


Primary threatening to erupt

Starting with IG non-financial issuance. Ford Motor Credit became the latest US issuer in the market with a dual tranche offering, taking €1bn in a long 3-year at midswaps+175bp (-25bp versus IPT) and €750m in a long 6-year at midswaps+240bp (-20bp versus IPT). They were joined by ISS Global which issued €500m in a no-grow deal priced at midswaps+95bp for 7-years, with interest pitched at over €2bn for the transaction.

The third IG non-financial borrower was Aeroports de Paris which came with an €800m 15-year offering at midswaps+63bp. The deal had books up at €2.4bn and final pricing was tighter by 22bp versus IPT.

That Ford deal added to the Yankee borrowers in the euro debt markets with €46bn now issued by US-domiciled corporates this year, 33% of the total in IG non-financials. That is set to be maintained with Fiserv’s acquisition financing deal due.

In the high yield market, International Game issued €750m in a 7NC3 structure priced to yield 3.5% (-25bp versus IPT), while Spie SA issued €600m in a 7-year which was priced to yield 2.625% (-12.5bp versus IPT).

The flurry of senior financial debt came in the form of €1.25bn of OpCo debt from NatWest Markets at Euribor+72bp (-18bp versus IPT) and Estonia’s Luminor Bank issued €300m in a 3-year senior preferred transaction at midswaps+167bp (-13bp versus IPT). Next up was Svenska’s €1bn also in senior preferred format at midswaps+30bp with the 5-year deal priced 15bp inside the initial guidance.

Caixabank issued €1.25bn in a 7-year senior non-preferred at midswaps+145bp (-30bp versus IPT). Insurer Zurich Finance issued €500m in a 20-year offering at midswaps+85bp.

Notably, Indonesia was also in the market, for €750m in a long 7-year maturity priced at midswaps+145bp (-30bp versus IPT), with books at just under €5bn.


Positive in the absence of news

The Dax added 0.9%, the FTSE 0.3% and US markets were flattish, as at the time of writing. There was nothing remarkable about the session save for the positive tone coming from Asia’s rally overnight. Newsflow-wise we were light, although there was some cheer in the UK as wage growth in the 3 months to April rose by 3.3% at an annual rate.

In rates, the 10-year benchmark Bund yield was at -0.23% (-1bp), the 10-year Treasury unchanged to yield 2.14% and the Gilt in the same maturity closed at a yield of 0.85% (+1bp).

Credit index was only slightly positive with protection costs in moderate decline, leaving iTraxx Main 0.7bp lower at 60.4bp and X-Over lower by 3.6bp to 267.5bp.

In secondary cash, the market was better bid but the focus was squarely on the primary market. Still, we edged better with the iBoxx index tightening in every session this month so far, now at B+136.2bp (-1.3bp). Returns are also improving and IG (iBoxx index) has delivered 4.4% this year so far.

Mind, AT1 risk is on a roll too. Total returns here now are up at 8% in 2019 as mentioned earlier with spreads crunching tighter in the last few sessions (almost 100bp this month on the index). No Brexit worries in the sterling market with returns at 6.8% so far this year.

It goes on, the high yield market is also tightening up and the iBoxx index is now at B+447bp (-5bp) representing a 17bp improvement this month.

Have a good day.

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.