7th November 2019

Twin peaks

MARKET CLOSE:
iTraxx Main

48.3bp, -1bp

iTraxx X-Over

231.3bp, -1bp

🇩🇪 10 Yr Bund

-0.24%, +8bp

iBoxx Corp IG

B+108.8bp, -1bp

iBoxx Corp HY

B+384bp, -7bp

🇺🇸 10 Yr US T-Bond

1.96%, +14bp

🇬🇧 FTSE 100 6176.19, (+1.33%) 🇩🇪 DAX 12799.97, (+1.32%) 🇺🇸 S&P 500 3185.04, (+1.01%)

Record supply meets the demand…

There are still six weeks of business left in the market this year, but already IG non-financial corporate bond issuance has set a fresh record. Deals from Apple and Bayer took us zipping past the €285bn record from 2009. And a trio of transactions in a busy high yield primary market made for 2019 being the second-best year for deals in this market (€62bn). The final full-year volume for the former will comfortably exceed €310bn while the high yield volume will likely come in around €70bn – and short of the record €75bn issuance from 2017.

It was an eventful session with records broken but also, quite surprisingly, a couple of deals pulled as investors’ tolerance levels were breached. The push backs aside (and there have been a few this year), the heavy load of issuance in 2019 has not had a negative impact on spreads. In fact, the supply of deals has been comfortably absorbed, subsequent demand remains at elevated levels and final bond pricings continue to be rammed tighter versus initial guidance. Let the music play on.

Indeed, it’s been a win-win. Borrowers have got their record cheap funding in, hoarded it and are saving it for a rainy day, possible investment opportunities or just sensible balance sheet housekeeping.

Investors, flush with their own high levels of portfolio cash levels/inflows, have got their corporate bonds on board (and have room for much more) and with it, they have clipped some excellent performance this year (7%+ in IG, 9%+ in HY, 13%+ in AT1 markets). 2020 is another story where we, for one, think that total returns might well resemble a dust-bowl.

The story for the moment though is that record IG non-financial issuance – which had held firm since 2009. It has, of course, been helped by the record reverse yankee volumes, where US-domiciled borrowers currently boost the annual volume of euro-denominated debt by over €87bn, or 30.5% of the total.

As suggested and, by all accounts, there is more to come. November issuance has averaged €30bn in the 2014-2018 period, and we have seen as much as €40bn get printed. Already in this opening week of the month, we are upon at €9.5bn – leaving us thinking that the €30bn average of the previous few years is likely.


Primary glut met with massive demand

It was a blockbuster day in primary for the reasons highlighted, leaving IG non-financial issuance at a record €287bn year to date. But we also had a glut of deals to contend from all areas of the corporate bond market, in a very busy session. Demand for deals was extremely high as it has been all year, and shows absolutely no sign of letting up.

We also had deals pulled for being too rich and/or just not fancied suggesting investors retain a ‘sense of value’ in this record-breaking market. Bollore pulled its €500m 5-year deal while Nykredit Realkredit pulled its own €500m 10-year senior non-preferred, where books for both barely rose above the €500m mark.

IG non-financials first. We had €4.25bn of deals from Apple, Bayer and Stedin Holdings which took us to a fresh record for any year in history in this market. Apple went the green bond route as it issued €1bn in a 6-year at midswaps+15bp and €1bn in a 12-year at midswaps+30bp. Books were not disclosed but final pricing was 30bp inside the opening guidance. Stedin Holding issued €500m in a 10-year at midswaps+50bp which was -25bp versus the initial guidance off a €2.4bn book.

The deal of a very busy day came from Bayer AG as it issued a dual-tranche hybrid. The chemical giant issued €1bn in a 60NC5.5 structure priced to yield 2.5% and €750m in a 60NC8 priced to yield 3.125%. The pricing was 50bp inside the initial guidance for the former and a 62.5bp (!) for the latter off combined books above €10bn.

In the high yield market, RCI Banque issued €850m of Tier 2 debt, in a 10.25NC5.25 structure priced at midswaps+285bp off a book of €5.5bn allowing final pricing to be slashed by 55bp versus the initial talk. They were followed by deals from Owens-Illinois and Casino.

We had Owens-Illinois due to print a much increased €450m in a 5.25NC2 green bond at a yield of around 3% and the troubled Casino group priced €800m in a 4.25NC2 structure to yield 5.875% (-62.5bp versus IPT).

That flurry of deals took the year to date total to €62.3bn, and as stated above, it is now the second-best year for euro-denominated high yield issuance.

Against our expectations and what we might have anticipated given historical seasonal trends, senior issuance shows little sign of slowing. DNB lifted €2bn in a 4-year senior non-preferred at midswaps+35bp (-15bp versus IPT) and BBVA issued €1bn in a 7-year senior preferred at midswaps+52bp (-18bp versus IPT).

Rounding financial issuance off, Banque Internationale a Luxembourg issued €175m of AT1 notes, priced to yield 5.25% in a PNC6 structure.


Risk-on, safe-havens unloved

The markets received a boost at the very open with news from China that they and the US had agreed on the removal of some tariffs, albeit in phases. The rhetoric has become much more positive and seems certain to help bolster markets through the next few weeks, thus likely seeing out an excellent year for equity and credit performance.

The yin to that yang, however, was that German industrial production slumped in September, by 0.6% month on month versus -0.4% expectations, and by 4.3% in the year to end September (-1% in Q3). However one looks at it, German industry is firmly in recession and the economy as a whole will likely be confirmed as being such when domestic GDP data is released next week.

Still, the soothing in the US/China trade spat was the driver for more record highs in the S&P and Dow indices, European bourses rose by up to 0.8% and the risk premia associated with the trade issue continued to find its way out of rate markets. One would be forgiven in thinking that we had the green shoots of a recovery, somewhere!

At the close, the 10-year German Bund yield had risen another 8bp to -0.24%, the Gilt yield in the same maturity rose to 0.77% (+6bp) as the BoE kept rates unchanged in their monthly meeting, while US Treasury yields rose to 1.96% (a massive +14bp, 10-year). There were a couple of dissenters in the UK rate decision (7-2) and against expectations of a unanimous vote.

Of course, the credit markets were always going to have a better session but they underperformed stocks. In the synthetic sector, the cost of protection fell only marginally, where a better-offered market saw iTraxx Main a basis point lower at 48.3bp and X-Over at 231.3bp (just -1bp).

In cash, once again the clear attention was on the primary market. Still, the Street was tightening up the cash market into that equity rally and we had another squeeze in spreads. The iBoxx IG index closed a basis point tighter at B+108.8bp while the AT1 index gained another 7bp to B+437bp (25bp tighter this month already, -272bp ytd).

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.