- by Suki Mann
|10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY
|10 Yr US T-Bond
|FTSE 100 7,755.93, -13.21||DAX 13,246.33, +45.82||S&P 500 2,776.42, -9.82|
Primary bursts into life…
There was no midweek lull in the corporate bond market. The credit market was not for taking a break following a couple of days this week of decent primary activity. We had another bunch of deals keeping investors occupied and feeling a little relieved, as cash balances which need to get absorbed before year-end are doing just that. We might just be full-steam ahead into the Thanksgiving break and €2bn or (much) more of non-financial issuance per day at the moment is getting done.
Some will be advised and/or tempted to wait a while, because conditions will remain just as accommodating in Q1 as they are now. It’s just that there will be a gamut of borrowers to contend with, then all looking to get their funding away early once the new year kicks off – so get it in early. Anyway, we weren’t devoid of issuance as the likes of BASF, Union Fenosa and UPS in non-financials amongst others pitted their wares.
The current run rate, if sustained, is going to make sure that we have a ‘good’ year for issuance – just as we thought it might have fallen short of requirements and expectations following some erratic periods for primary at times. But we would also suggest that the ECB will have failed in the part of its grand plan to boost IG issuance through the QE effort, while it will have succeeded in disintermediating funding for lower rated corporates usually much more reliant on the banks for their support.
The high yield market has smashed the previous record for issuance in any given year and we could be 25% higher than it by year-end. So here, the grand plan will have succeeded in shifting the risk from the banking sector to the capital markets as the QE purchases will have forced investors into riskier assets.
For this to be seen as a long-term success, we would need the HY primary markets to be as effusive through 2018 and then 2019 once the asset purchase programme finally ends. Then we might be able to believe that the high yield market in Europe is no longer a fledgling one, given its propensity to shut down completely in crisis conditions – where funding costs become prohibitive (or too much to stomach) – unlike in the US. Anyway, that’s for another day.
Equities might have faced an uncertain session again barely moving in a lacklustre European session. Duration risk was better bid, for choice, as was credit but the focus here for investors was on those new deals.
BASF takes centre stage
Primary markets churned out a relatively huge day of issuance with BASF the stand-out borrower, taking €3bn in a 3-tranche offering. The group took funding in 2-year floater format and 10-year and 20-year fixed tranches taking €1.25bn, €1bn and €750m, respectively.
The final pricing for the fixed tranches was 15bp inside the initial guidance, made possible on books exceeding €11bn. Next up was Gas Natural Fenosa which printed €800m in a 7.5-year green bond which cost midswaps+40bp and was 20bp inside the initial guidance (books €2bn).
Also managing to reduce the initial guidance by 20bp, Galp Energia funded €500m in a long 5-year at midswaps+85bp. US parcel giant UPS took €700m in a 6-year maturity at midswaps+12bp and €500m in a 15-year offering priced at midswaps+30bp, both priced 12-15bp inside the opening talk.
So IG non-financials threw up a massive €5.5bn, almost doubling the monthly total to €11.5bn and we are now up at €239bn for the year so far. In the Reit space, Alstria Office clipped €350m at midswaps+80bp in a 10-year deal.
Financials were busy with a dual-tranche senior preferred from Society Generale which took €1.5bn split equally between a long 5-year and a long 10-year. Not to be left behind, CMC di Ravenna priced €325m in a 5.25NC2 deal priced to yield 6% for the HY market and the annual total here rises to €63.8bn!
Not terribly exciting elsewhere
Gilt yields continued to decline and, with little on the economic front to provoke the move, we once again think it was due to the political scene with the Tory government in somewhat of a bind on several fronts. The 10-year dropped another 2bp to yield 1.21%. Elsewhere, Bunds were flat, the 10-year yielding 0.32% with the same story in the US, the equivalent maturity Treasury at 2.32%. Spanish debt gave back all of Tuesday’s gains with the Bono yielding 1.47% (+6bp).
As for equities, they spent most the session in the red – but just a small down, lacking anything to really feed off to go higher and always fretting about what might evolve in the Middle East (Saudi/Iran) and from Trump as his Asia trip took in China on its latest leg. Into the close, US stocks were edging higher – and of course, close to setting fresh intraday records.
So credit took its cue from that moderate risk-off and lacklustre largely directionless session elsewhere. As evidenced by the liquid credit risk proxies, the cost to insure credit rose with Main up at 51.6bp (+1.4bp) and X-Over at 233.3bp (+6bp).
In the cash market, we had the worst reversal in spreads for a month with IG a little weaker, the Markit iBoxx index wider at B+96.3bp (+1bp). Higher yielding debt went the same way, the CoCo index for example 12bp wider (off record tights). In high yield we saw some defensiveness in the final marks too, because the flows were extremely light to justify the 6bp of index weakness (B+261bp) in the index – also off a record low level.
Have a good day.
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