12th May 2016

Unintended consequences

FTSE 100
6,162, +6
9,975, -70
S&P 500
2,064, -20
iTraxx Main
76.5bp, unch
iTraxx X-Over Index
323bp, unch
10 Yr Bund
0.12%, unch
iBoxx Corp IG
B+146bp, +0.5bp 
iBoxx Corp HY Index
B+428bp, +1bp
10 Yr US T-Bond
1.74%, -2bp

A reverse Marshall Plan…


Kraft Heinz CEO Bernardo Hees

General Motors, a 4-tranche blockbuster from triple-A rated Johnson & Johnson and a dual-tranche transaction from Kraft Heinz made for a heavy day of supply from US borrowers. US corporate borrowers have accounted for over 25% of this year’s total supply of IG euro-denominated non-financial corporate debt. This paper is not necessarily eligible for the ECB’s corporate bond purchasing programme (unless the issuing entity is domiciled in the eurozone), but that doesn’t matter. It is actually another unintended consequence of the ECB’s actions in that the central bank is not only offering cheap funding to eurozone corporates, but to their American competitors too! They’re here, it’s usually cheaper, the market is receptive and they’re getting size done. Investors love them!

We again had some very moderate weakness in secondary, and odd areas of concern are appearing. After all, why ever should we go wider when the buyer of last resort is going to take us tighter in a few weeks’ time – and keep us there? If only it was that easy to work out… well, it is. There is a lot of primary at the moment – €25bn+ already this month and we are not even half way through it – with the prospect of much more to come. Some will be making room for the swathes of supply slated for launch. To do that, they will be booking profits, selling out of some (likely) low-beta paper and hoping to replace it with a new issue. However, recycling that secondary means the original slightly weak bid makes the market look weak(er). This isn’t necessarily the case.

We had more longer-dated sovereign issuance as Spain joined the growing number of countries issuing ultra-long maturity debt. Their 50-year issue follows on from the likes of Belgium and France, while Belgium and Ireland have gone even longer. Not to look a gift horse in the mouth, Italy is also looking at 50-year money. We can understand why sovereigns would do this – it’s cheap! They’re locking in low-cost/coupon funding for an eternity. For investors? We’re not convinced that this is a good trade even for asset-liability reasons.

Record May month for issuance coming up

Records are there to be broken and we’re going to smash the previous issuance high seen for a May month. That came in May 2009, with €38.7bn printed in non-financial corporate issuance (see chart).We are already up at €25.6bn, and next week’s business might just see us get there. The record for any month is €48.7bn (January 2009), and we probably ought to thinking in terms of an assault on that level before the month is out.

IG non-financial issuance: Top 10 May months


On Wednesday GM took €500m, pricing the the 4-year deal 20bp inside the initial guidance. J&J took €3.75bn in 5, 8, 12 and 19-year maturities, with final pricing being tightened by a more modest 8-13bp across the various tranches. Kraft Heinz (8-year and 12-year maturities) closed out the day’s business for US borrowers with a €1.8bn raid and lopped 20bp off the initial guidance for the privilege. Other deals came from Hong Kong-based State Grid Overseas Investment and the first non-financial corporate hybrid for 2016 (actually since OMV in November) from Total SA. SGOI lifted a billion in inaugural 6-year and 9-year funding, while Total’s perpNC6 structure was for a whopping €1.75bn and was priced to yield 3.875% (inside a 4% area IPT on books of €6bn). The total IG non-financial issuance in the session amounted to a stunning €8.8bn. Santander was the sole borrower in senior financials taking €750m in a 5-year issue.

The high yield market had a busy day for a change, with three deals. Single-B rated BiSoho raised €471m in a dual tranche offering, Wepa Hygieneprodukte lifted €450m in an 8nc3 structure at 3.75% and Volvo Car AB was looking to pay 3.375% for €500m in 5-year funding. There is much more to come in this market, but likely through a structural shift once the ECB starts buying IG corporates.

Macy’s warns, but we were already weak


Profit warning: Macy’s

Macy’s profit warning and assessment of weak consumer spending hit stocks into the afternoon session, but they were weak in Europe anyway. We suggested previously that there would be no rate hike in June in the US, and news like this supports our expectations. US stocks opened in the red and stayed that way throughout. Europe led from the front though, on the back foot from the opening bell. The DAX fell back through 10,000 having briefly risen above it in Tuesday’s session.

The OECD’s monthly report painted a bleak picture for the UK and US economies – expecting them to see slower expansion while suggesting that the eurozone will show some stability, albeit at low levels. They could be reassessing the situation in a few weeks after the Brexit vote! Other news was light, taking in for example the EC’s decision to block the acquisition of O2 by Hutchison (Three mobile network owner) on competition grounds.

So, we closed out with European stocks down by 0.5-1%, oil pushed higher once news that US inventories declined last week was released having languished before it (Brent almost $48 again) and government bonds in Europe closed pretty much unchanged. Treasuries had a decent session, rallying such that the 10-year yield fell to 1.74% (-2bp) as stocks gave back much of their stellar gains from Tuesday’s session.

In credit, we edged wider as suggested above, and that left the Markit iBoxx IG index at B+146bp. The HY index was up just a basis point (noise) at B+428bp. The weakness is nothing we think anyone should be concerned about. It is actually very limited given the level of supply flooding the market.

That’s all folks, back in the morning.

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.