2nd July 2019

Treading water

MARKET CLOSE:
iTraxx Main

59.7bp, -1.1bp

iTraxx X-Over

243.5bp, -3.3bp

🇩🇪 10 Yr Bund

-0.37%, -1bp

iBoxx Corp IG

B+123.6bp, -1bp

iBoxx Corp HY

B+412.5bp, -4bp

🇺🇸 10 Yr US T-Bond

1.98%, -5bp

🇬🇧 FTSE 100 6179.75, (+0.06%) 🇩🇪 DAX 12697.36, (-0.80%) 🇺🇸 S&P 500 3197.52, (+0.60%)

Keeping the faith…

The euphoria of the month’s opening session hit a brick wall, leaving us with what could best be described as a more reflective day for the most part. Hopes and positive soundbites driving markets higher were replaced by the need for something more concrete to emerge from any US-Sino talks. Markets were treading water. Macro is in need of a boost and help can’t come soon enough – and we need more than just a US rate cut. We could have done without the US proposing additional tariffs on $4bn of European goods over the long-running dispute on EU aircraft subsidies.

In credit primary, we had a decent session with some big orders for deals from Saudi Arabia and Commerzbank’s inaugural dollar-denominated AT1 offering. One would suppose we can call into question how much primary activity we might get in Wednesday’s pre-July 4 session, given that the US markets are only open for half of the day. That might be close to being it for the week as we will draw a blank on Thursday and pre-US non-farm payroll activity will see to Friday being quiet, too.

So, while equities did very little, rates were finding favour in several markets. The big move was in the UK.  There was an awful drop in UK construction activity in June where the PMI fell to just 43.1 against expectations of 49.3 – and to the lowest level since April 2009, immediately bidding up the Gilt market. The 10-year benchmark yield dropped to 0.72% (-9bp) while sterling weakness made sure that UK equities outperformed.

It is reasonable to expect that we will likely grind out some spread performance this week. Sustained weakness in spreads (through July) can now only come if event risk takes equities materially lower. That could come in the form of geopolitical events say in the Middle East or in Asia (Hong Kong) or, as in May, a breakdown in the promised re-engagement of talks between the US and China on trade.

The iBoxx index, as a measure for where the broad market stands now, in IG could be close to B+110bp come the end of July – which would mean another 10% or so of tightening in spreads. We suggested in previous comments that higher beta credit will outperform as the investor grabfest for yield supports those markets. Witness Tuesday’s $11bn of orders for Commerzbank’s $1bn AT1 issue (coupon 7%).

The AT1 index is now 200bp tighter year to date, and the sector has returned a little over 10%. In high yield, the index is 107bp tighter with returns approaching 8%. We could be looking at returns of 11% and 9%, respectively, come the end of a fairly quiet summer.


Primary still ticking over

Deutsche Telekom issued €1.25bn

As mentioned, the deals that took all the plaudits were those from Saudi Arabia and Commerzbank. The latter took $1bn in a PNC6 issue costing 7% which was 50bp lower than the initial guidance, off a book which was up at around $11bn. As for Saudi Arabia, the Kingdom issued €1bn in an 8-year at midswaps+80bp and €2bn in a 20-year at midswaps+95bp. The order books across the tranches was up at €14.5bn and final pricing 30-35bp inside the initial guidance levels.

In IG non-financial markets, Deutsche Telekom was the sole borrower issuing €1.25bn in an 8-year maturity at midswaps+60bp and €850m in a 15-year transaction at midswaps+100bp. Books were up at €4bn and final pricing 15-20bp tighter versus the opening talk. So in the opening two sessions, we’ve had €4.3bn issued and we look for somewhere at up to €15bn for the month.

Senior financials were represented by Bankia’s 7-year senior preferred €750m offering, priced at midswaps+88bp, which was 22bp inside the opening guidance off a €2bn book. Elsewhere, real estate investment group Aroundtown SA issued €800m in a 6-year and €600m in a 9-year. The deals were priced at midswaps+115bp (-20bp versus IPT) and midswaps+157bp (-23bp versus IPT), respectively. Combined books were at over €4bn.


Subdued but rate markets find favour

The markets generally ticked over. The FTSE closed 0.8% higher, the Dax and other Eurozone bourses flattish, while US equity markets ended with the S&P at a new closing record high!

The big rate move was in Gilts, as mentioned, but also in BTPs again. The 10-year Bund closed at a fresh record low yield of 0.37% (-1bp), and we saw a bid eventually emerge for Treasuries leaving the 10-year yield to drop to 1.98% (-5bp), as at the time of writing.

Italy: Few will short

In Italy, the 10-year BTP yield dropped 10bp to 1.84% from returning confidence after reports of an agreement being reached to adjust the budget in the hope of avoiding that EU excessive debt procedure and a fine. With the demand for yield also in play, few will be shorting Italy here.

Protection costs in credit declined some more, though, with iTraxx Main slipping below 50bp to 49.7bp (-1bp) and X-Over down at 243.5bp (-3.3bp).

The grind tighter in secondary took the IG iBoxx index to B+123.6bp (-1bp) and the index yield to a new record low of 0.69%. In high yield, the index spread tightened to B+412.5bp (-4bp).

We will be back on Monday. 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.