7th October 2020

🗞️ Wising up to US political risk

MARKET CLOSE:
iTraxx Main

53.5bp, -0.6bp

iTraxx X-Over

318.1bp, -2.4bp

🇩🇪 10 Yr Bund

-0.49%, +2bp

iBoxx Corp IG

B+122.9bp, -0.8bp

iBoxx Corp HY

B+457.5bp, -2.5bp

🇺🇸 10 Yr US T-Bond

0.77%, +3bp

🇬🇧 FTSE 100 5860.28, (+1.29%) 🇩🇪 DAX 12645.75, (+0.82%) 🇺🇸 S&P 500 3465.39, (+0.34%)

If that were ever possible…

For once, markets didn’t fall out of bed, in Europe anyway. Trump has cried wolf so often that it might just be that investors have developed a thick skin, and are perhaps looking through his persistent berating. The US equity markets reacted poorly overnight but we didn’t follow in Europe. There was relative calm.

We would think that some sort of US fiscal stimulus is being priced in. That will come courtesy of either a smaller Trump injection, or the promise of a rocket-fuelled Biden one – should he be victorious in under a month’s time. Either way, once we get through the current noise, markets are going to rise.

Equities and rates might have been treading water in the session, but that didn’t hold back the corporate bond market. The screens lit up with a plethora of deals and it was just the tonic after a couple of weeks where primary threatened to burst into life. There was plenty to get hold of and we might just see this continue through the rest of this week and into next.

Thereafter, if the markets generally remain buoyant, we should still be busy ahead of the US election with some nerves creeping back in a few days either side of it. Fortunately, the demand side is holding up really well and borrowers seem still to be looking to get deals away/cash on board ahead of any uncertainty. That’s certainly the narrative being pushed by bankers eager to get deals printed.

That confidence in the corporate bond market will help secondary spreads squeeze. We’ve already witnessed that as the opening week of October, for example, has already seen the IG IBoxx cash index recover all of September’s (rather modest) losses. Higher beta markets (HY and AT1) are also holding firm with little correlation, at the moment, with equity volatility.

So the final quarter ought to see little by way of portfolio shifts/changes by investors. The portfolio cash levels are plentiful, the signs are that the corporate bond market still retains good, broad interest and the bid for primary rock solid. IG spreads (around B+123bp) are back at the tighter end of the established ranges of the past two months (B+120bp – B+128bp, iBoxx) and there is a good chance we see levels break through them.


Green deals see highest levels of interest

The IG non-financial sector was the dominant borrower group in the session. Interest for the deals varied from 2x to over 10x, as measured by the oversubscription in investor interest, and financial pricing of the deals was as much as 62.5bp tighter versus the initial guidance. That’s all about taken for granted these days.

First out was Finnish group Tornator Oyj, with €350m in a 6-year priced at midswaps+165bp which was 35bp inside the initial talk, with book at around €900m. Arkema SA followed also with a sub-benchmark deal, but in green format with a €300m 6-year at midswaps+60bp, which was 35bp inside the opening talk, with interest pitched up at a significant €3.2bn.

The benchmark deals came from Rentokil, which took an increased €600m in an 8-year at midswaps+85bp, 35bp inside the initial chatter off a book at almost €3bn. Danish pharmaceutical group Lundbeck was in for €500m in a 7-year maturity at midswaps+125bp (-50bp versus IPT, books €3.7bn) and Eutelsat printed €600m in an 8-year at midswaps+185bp, -40bp versus IPT (books €3bn).

The Lundbeck and Arkema deals were probably the pick of the bunch of the non-financial deals. We finished up with Orange’s €700m hybrid, taking the form of a PNC8 structure, priced to yield 1.8% (-45bp versus IPT, with books at €3bn).

That’s €10bn this month so far in IG non-financial issuance which, if this rate continues, will see close to €40bn for the month. At €330bn issuance for the year to date, we are already €12bn ahead of the total for the whole of 2019.

In financials, there was a senior offering from BNP€750m in a 7NC6 green deal, in senior non-preferred format at midswaps+80bp (-25bp verso IPT, books €3.1bn). Credit Agricole plumped for an AT1 deal, printing €750m of a PNC7.5 at 4%, with books at €4bn and final pricing 62.5bp tighter than the initial guidance.

Worth a mention also was Spanish REIT Inmobiliaria Colonial’s no-grow €500m offering, priced at midswaps+170bp for the 8-year transaction (-25bp versus IPT, books €1.7bn).


Back to square one

Equities spent most of the session treading water in Europe, not sure whether to go higher in anticipation of a better US open, or to reflect the overnight US equity market losses. So nothing too much happened for the most part, leaving the FTSE to close unchanged and the Dax just 0.2% higher. In the US, as at the time of writing, Tuesday’s steep losses were promptly recovered, with the indices trading around 1.4% higher.

Rates closed flattish to better offered, and as such yields edged a touch higher. The UK 10-year is now back up to yield 0.30% (+1.5bp), the Bund in the same maturity -0.49% (+2bp) and the Treasury was yielding 0.77% (+3bp).

Primary credit markets were keeping investors occupied, but the tone overall was better and that helped credit squeeze on some more, following some decent gains in the previous session. In the synthetic market, the cost of protection dropped moderately, with iTraxx Main at 53.5bp (-0.6bp) and X-Over at 318.4 (-2.1bp).

In cash, and amid little activity the iBoxx IG cash index closed at B+122.9bp (-0.8bp) and the high yield index at B+457.5bp (-2.5bp).

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.