15th Apr 2016

Zero or the mattress

MARKET CLOSE:
FTSE 100
6,365, +2
DAX
10,094, +68
S&P 500
2,082, unch
iTraxx Main
72bp, -2bp
iTraxx X-Over Index
310bp, -5bp
10 Yr Bund
0.17%, +4bp
iBoxx Corp IG
B+148.7bp, -1bp 
iBoxx Corp HY Index
B+509bp, -8bp
10 Yr US T-Bond
1.78%, +2bp

Back to zero…

allianz

Allianz: Deal yielded just 11bp

Did anyone even care that Allianz’s 4-year issue on Wednesday offered a 0% coupon? Is it really old news? The deal follows on from Sanofi’s slightly shorter maturity bond a couple of weeks ago and Engie’s transaction last year. With effortless aplomb, we now accept nothing (well, a bit of yield) as being completely normal. Some might think we are sleepwalking into disaster. And the deal statistics show that real money bought 67% of the transaction. Worried about your pension? Allianz’s deal yielded a paltry 11bp at reoffer – a little more now as it broke a touch weaker.

The bean counter for zero-coupon – priced close to par (€99.6 in the case for Allianz) – bonds is at two for 2016. There are more to come, and we can expect them to soon extend to longer maturities and eventually also into lower-rated corporate bond issues. Secondary performance of deals is beginning to lag a little now too. Some are still roaring ahead, but we’re seeing an increasing number of soggy performances. We would like to think syndicates will finally realise that ratcheting deals 20bp or so tighter versus those initial indications has run it course.

Investors need to feel the love that comes with deals breaking tighter. Unfortunately, any change to current dynamics will be slow in coming. The fragmented nature of the euro-denominated debt market landscape breeds much insecurity and that “what if?” is always going to leave investors piling into deals (or at least not pulling out of them). And banks and borrowers will always take advantage.

Reality check for corporate bonds?

The week didn’t quite go as planned. Supply came, but was 50% of what we had last week. Spreads have barely moved in IG. That initial ECB-inspired boost has faded and, we have to admit, that’s against our expectations of more quicker significant tightening. Non-financial IG supply is now up at €21bn and just €7.5bn. It looks like the €26.7bn record April issuance level is safe for another week. The assault on the €48bn monthly record has failed,though. Also, we don’t see issuers chomping at the bit to get deals away. That was an expectation for some, but as we have suggested previously, there should be no rush to get deals away.

M&A refinancing and the like offers excuses aplenty – as does refinancing maturing debt – but hoarding cheap cash is no reason to be in this market. Because it has to be invested, and given the economic outlook and lack of opportunity for higher returning investments, it’s better to pass. As for spreads, they have been very stable all week. Interest has been focused on higher beta issues in secondary, where the likes of the corporate hybrids have been popular. But otherwise, we’ve moved sideways overall, with the Markit iBoxx index anchored at around the B+150bp area.

A couple of billion from primary non-financials

john deere

John Deere: €250m 4-year floater

Iberdrola’s green bond becomes the latest such offering, with the 10-year deal for €1bn eventually priced at midswaps+63bp, some 17bp inside the initial price talk. Added to it was a small deal from John Deere (€250m, 4-year floater) and a 7-year transaction for €850m from Spain’s Merlin Property that eventually priced 20bp inside IPT at midswaps+200bp. The rest was the usual smattering of covered bonds and SSA deals. So, just 11 borrowers this week with the potential for a deal or two today. That’s compared to twelve borrowers for last week, but last week’s deals were for €13.5bn.

Decent end to a subdued week in secondary

We closed out Thursday with European equities all in the black, by up to 0.7% (DAX). Oil was eventually a small down with Brent prices per barrel consolidating at around the $44 level. Government bonds gave a little back with the 10-year Bund yield up at 0.17% (+4bp) while peripheral bond yields also rose with BTPs at 1.35% and Bonos at 1.50% (around 5bp higher in the session). For corporate bonds, Thursday saw a decent session with spreads slightly tighter and the Markit iBoxx index falling to B+148.7bp (-1.2bp), with higher beta risk in the ascendancy.

CoCos and corporate hybrids were in great shape moving 0.25c-1 point higher in price. That carried on right through to the HY market where prices edged better for choice. We ended with the index at B+509bp and the index yield lower at 4.83% and these are now both at their 2016 lows. These HY index levels were only bettered back in earlier December last year. No signs of nerves here amid much brouhaha around the US speculative grade default rate. The iTraxx indices edged lower too with Main at 72 and X-Over ending the session at 310bp, 2bp and 5bp tighter, respectively.

Have a super weekend, back on Monday.

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.