26th June 2018

Who needs enemies with friends like…

MARKET CLOSE:
iTraxx Main

74.3bp, +1.2bp

iTraxx X-Over

317.5bp, +4.2bp

🇩🇪 10 Yr Bund

0.34%, +1bp

iBoxx Corp IG

B+132.1bp, +2bp

iBoxx Corp HY

B+403.5bp, +6bp

🇺🇸 10 Yr US T-Bond

2.88%, unchanged

🇬🇧 FTSE 100 , 🇩🇪 DAX , 🇺🇸 S&P 500 ,

Trade war tops the bill

The concern we all have about the unfolding trade war remains the pivotal issue for the market. The UK has additional concerns given how big business is now throwing its toys out of the pram and reducing UK investment – with spending plans apparently being thwarted because of Brexit. Risk assets failed to gain any traction to pull out of the misery being heaped on them and with the trade war saga having legs in it yet, we are going to close the first half out in somewhat depressed fashion.

For instance, the engine of the Eurozone’s industrial might, Germany, is going to see her stock market lower by 5% or more for the first half, should the DAX fail to rise from current levels. And we will second-guess that the outcome of the EU meeting this week will be no agreement (read fudge) on immigration, the budget and Brexit.

There are a number of dogfights going on. The EU-27 as represented by Barnier et al versus the UK on Brexit, the EU southern and eastern members versus the northern countries (Germany and France mainly), and Trump versus the rest of the world on trade tariffs. The latter one is quite clearly the most dangerous for the global economy, hence the intense focus on every headline (e.g. Harley Davidson on Monday).

With that front and foremost, we failed to pull out of the current lull in Tuesday’s session in any meaningful way. We do think that any chink of light would be seized upon with some wanting to get their returns up through the final sessions into the end of the first half. The problem is, that the news flow remains bleak – and certainly wasn’t helped when on Monday the US administration suggested curbing Chinese investment in areas of intellectual property.

The credit market took it all on board and there were deals galore on the screens but, alas, barely anything (again) from the bell-weather IG non-financial corporate sector. We had plenty from supranational bodies, sovereigns, covered bonds and senior financial borrowers – the easier ones to get away, but it was only German construction group Hochtief coming up trumps for the non-financial sector.

That IG non-financial issuance at only €20bn for this month has underwhelmed, just as it has for the whole of the first half (at just €115bn). We can take more, we want more….


Spanish plume in primary

They took €10bn in 10-year funding off a €43bn book in January (at midswaps+46bp). This time, Spain lifted €7bn also in 10-year funding off a €24bn book, priced at midswaps+54bp. This was the highlight of the day’s deals. Spain was never going to be materially affected by the Italian situation, but there has been apprehension around Italian politics such that rate markets generally in the periphery have been impacted, with yields heading higher. Given that, this was still a good deal for the sovereign.

France was the other sovereign in the market, tapping its 2039 maturity green issue for a further €1.4bn. The EIB was the supranational representative, taking €4bn in a 7-year.

Elsewhere, the IG borrower in non-financials was Hochtief, which issued €500m in a no grow deal priced at midswaps+127bp for 7-year funding, which was 18bp inside the initial talk. The book was around 3x subscribed.

Sparebank 1 issued €500m of senior debt at midswaps+60bp in a 5-year and Ireland’s AIB Group lifted the same amount in a 7-year at midswaps+180bp. Finally, German REIT Vonovia was back, this time for 5-year debt priced at midswaps+73bp for €500m.


Tedious markets

The session turned out to be quite a tedious one, with few willing to get involved amid a flurry of ‘Trump-Tweets’ berating Harley Davidson for its actions. So equities did very little, barely changed across the board in Europe – but slightly better bid, nevertheless.

In rates, most markets closed the session unchanged with 10-year Bund yields at 0.34% (+1bp), Gilts yielding 1.30% and the 10-year Treasury benchmark at 2.88%. 10-year BTPs yields rose to 2.91bp (+6bp).

Credit protection costs continued their climb higher, Main up 1.2bp to 74.3bp and X-Over moved to 317.5bp (+4.2bp).

The Markit iBoxx IG cash index moved a couple of basis points wider to B+132.1bp which is the widest level since the end of last month as the secondary market came under some pressure form all the tensions elsewhere. For once, the sterling market also moved wider, by 2.5bp to G+158.5bp amid little flow and volume.

And finally, the high yield market didn’t buck the trend, the index widening another 6bp to B+403.5bp – the widest level since the turn of the month too. This index is 115bp wider YTD and total returns in high yield are at -1.4% so far in 2018 (that’s better than most equity markets).

Have a good day.


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

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.