15th March 2017

Tulipomania

MARKET CLOSE:
FTSE 100
7,358, -9
DAX
11,989, -1
S&P 500
2,365, -8
iTraxx Main
74bp, +1.5bp
iTraxx X-Over Index
290bp, +3bp
10 Yr Bund
0.44%, -2bp
iBoxx Corp IG
B+132bp, +1bp 
iBoxx Corp HY Index
B+372bp, +7bp
10 Yr US T-Bond
2.60%, -1bp

Moving on from the Fed

It was all about the Fed. But today’s FOMC is now ‘so yesterday’ in market terms. It’s a nailed-on certainty that a rate hike is coming with two or three more to follow in 2017. The market’s more immediate concerns should be around the Dutch elections.

The right-wing populist party (PVV) of Geert Wilders isn’t going away and there is a chance (however small) – with the current spat with Turkey doing its best to help, that we get the upset the polls aren’t predicting. If the PVV win power, there will be massive consequences for the markets.

Safe-havens like German Bunds and Gilts (Treasuries too no doubt) will be better bid while the periphery and likely even OATs will come under pressure. The latter on market apprehension as to what the French elections might deliver.

We ought to be a little nervous. If there are any takeaways from some of the recent elections (Brexit, US), it is that the polls have been getting it spectacularly wrong. In the meantime, we know that the UK is triggering Brexit before March is out, while the Scots – or rather the SNP, are unlikely going to get any new referendum on independence before the UK has dealt with the EU. Also, some certainty! As for the day’s events, the markets spent the session on Tuesday treading water as we might have expected, given what we could be waking up to on Thursday.


Primary markets deliver

Legal & General issued $850m in Primary

The tone was cautious and flows throughout the session were lighter than we might expect. But primary still delivered a few deals to keep us occupied. As if they were nervous ahead of the election, Dutch-based publisher Wolters Kluwer made a fairly rare visit to the markets with a €500m, 10-year deal at midswaps+65bp but still managed to elicit enough interest to see fit to reduce the spread to investors by 20bp. No surprises there.

In the high yield market, the recently acquisitive French auto group Peugeot (rated Ba2/BB+) was issuing €600m to yield 2% in a 7-year transaction – and managed to reduce that offered yield from the opening level of 2.375%. Clearly, there was much IG investor related interest in this blue-chip borrower. Elections, M&A, event-risk… who cares? Yield, name recognition, an attentive domestic audience and a generally strong demand environment all helped making this a good deal for this issuer.

Staying with high yield, Paprec tapped its 2022 issue for €225m. HY market issuance for the month is now up at a sprightly €5bn – with just two weeks gone.

In a busier than expected primary session, UK insurer Legal & General issued $850m in a 30NC10 Tier 2 format to yield 5.25%. US real estate investment group, Medical Properties Trust Inc added €500m in an 8-year deal – paying up a hefty 3.325%, for a crossover-rated credit.

And in sterling high yield, Moto Finance popped up with a £150m 5.5NC2 2nd lien structure yielding 4.5%. We can think that today is going to be very light in terms of primary.


Poised into wobbly Wednesday

Equities continue to come off their high horse, as we had another small down session in Europe (more in the US) while government bond markets were a touch better bid. News of a formal investigation against Fillon in France (largely expected, but not suggesting he necessarily guilty of a crime) had OATs unchanged to slightly better offered while Bund yields edged 2bp lower to 0.44% (64bp spread versus OATs, up a touch). Gilt yields edged to 1.22% (-2bp), after May’s fairly combative performance in the Commons.

In the credit market, secondary was weaker – and the first session in over a week where the cash market was better offered. Investment grade spreads as measured by the Markit iBoxx index were up at B+132bp (+1bp), while the index yield fell to 1.29% (-2bp) owing to the better bid for the underlying. The IG sterling market edged just 0.25bp wider (noise), the iBoxx index at B+149.3bp.

The high yield market backed up more than we might have expected, the index showing B+372bp (+7bp). We might be having the first vestiges of weakness on the back of high levels of primary market activity or (more likely) contagion coming from weakness in the US high yield market where the drop in oil prices is having an impact there (WTI below $48 as the Saudis ramp up production). Either way, it was one of the weakest sessions from a spread perspective in a while.

Finally, the indices were higher with iTraxx main at 74bp (+1.5bp) and X-Over up at 290bp (+3bp).

Have a good day.


For the latest on corporate bonds from financial news sources, click here.

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.