2nd April 2020

💉 Corporate bond primary on steroids

iTraxx Main

108.5bp, +5.5bp

iTraxx X-Over

612.5bp, +11bp

🇩🇪 10 Yr Bund

-0.44%, +3bp

iBoxx Corp IG

B+251bp, -1bp

iBoxx Corp HY

B+775bp, -8bp

🇺🇸 10 Yr US T-Bond

0.61%, -3bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”24″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

Not quite broken markets everywhere…

Albeit seemingly on steroids, the only market doing what is says on the tin, in the sense that everyone is satisfied, is the IG corporate bond primary one. We have become used to equities not unusually up or down by 3-5% per session, rates better bid or offered depending on which way the wind blows and secondary credit spreads tighter or wider – no matter what.

Now borrowers are falling over themselves to get deals away. Fund managers might have been barricading the doors at one end to help stem the outflows, but they’re piling into corporate bonds on the other. Coverage ratios are a bit more hit-and-miss now though, perhaps exhibiting signs of investor fatigue.

What was (at first) all about good, solid double-A/high single-A corporates accessing the markets, has become – inside a week – something for triple-B borrowers, too. And that includes peripheral ones.

And it looks as if primary credit markets are getting carried away. We are seeing the issuer rating head lower, and now we are not too far from a high yield borrower getting a deal on the screens. This market has been shut since 20th February. We’ve drawn a complete blank in HY primary for over 6 weeks.

It’s a record period of absence of a deal for the euro-denominated HY primary market. Nevertheless, we are edging lower. HeidelbergCement, rated low-triple-B, was in the market on Thursday and is the lowest-rated borrower to issue since the market reopened.

It appears that we have found an uneasy truce on the secondary spread front. We will need a major tanking in equities (not impossible) for credit spreads to take another serious leg wider from here.

As such, IG secondary isn’t doing too much which is understandable given the welter of issuance which is keeping secondary repriced at these wider levels. The high yield market is trading up/down depending on equities and it is about the same dynamic in the AT1 market, at the moment.

Primary’s splurge continues

There’s no let up in the issuance pace and we had another massive day of deals on Thursday, following on from the €7.8bn (8 tranches) of IG non-financial corporate bond issuance on Wednesday. If this pace continues, the Easter holiday lull notwithstanding, we’re on course for the first €50bn+ month since panic-driven issuance in 2009.

In the second session of the month, we had €10.8bn of IG non-financial debt issued, taking the 2-day April total to a massive €18.7bn – and a stunning €113bn year to date.

Schneider Electric was in the market for €500m of a 7-year at midswaps+125bp. The final pricing was a massive 60bp inside the initial guidance and books were up at almost €9bn. This borrower last came just a month ago, for €800m in a 9.5-year at midswaps+58bp. The other single tranche issuer was HeidelbergCement, taking €650m in a 4.5-year at midswasp+285bp, which was 25bp inside the opening talk with books up at €1.3bn.

Shell’s last 12-year in November came at midswaps+33bp as it also printed an 8-year at midswaps+23bp. Oil prices have since been battered and sentiment shifted markedly from the sector. This time they printed €1bn at midswaps+190bp for a 12-year maturity, and also issued €1bn in a 4-year at midswaps+145bp with a further €1bn in an 8-year at midswaps+170bp. Final pricing was 45bp tighter across the tranches versus the initial price guidance, as combined books came in at €11.5bn.

BAT issued €1.7bn, split equally between two tranches of a 4.5-year and an 8-year maturity, priced at midswaps+275bp and midswaps+335bp, respectively. They were 35bp inside the initial talk with book approaching €6bn.

Back in oil, BP took €1bn in a 4-year at midswaps+215bp (-25bp versus IPT), €1bn in an 8-year at midswaps+265bp (-25bp versus IPT) and €1.25bn in a 12-year at midswaps+280bp which was 30bp inside the initial chat. Books were up at around €7bn.

Last, but not least, Austria’s OMV issued €500m in a 4-year at midswaps+195bp, €500m in an 8-year at midswaps+215bp and €750m in a 12-year midswaps+240bp, with all the tranches 20bp inside the initial guidance and books up at around just €3.4bn.

In senior financials, Lloyds Bank issued €1bn at midswaps+270bp in a 6-year maturity opening the account for senior issuance for the month. Unibail-Rodamco issued a combined €1.4bn in 5-year/10-year offerings priced at midswaps+240bp/280bp, respectively. Grand City Properties issued an increased €600m in a 4-year at midswaps+235bp.

And, finally, Volkswagen Financial lifted £350m in a 5.5-year at G+425bp.

Equities try to buck the trend

On the data front, Eurozone PPI in February fell by 0.6% month-on-month and -1.3% year on year, in February. That was to be expected and other inflation data through the next few months will not show any improvement in the numbers.

And then we had that record weekly US initial jobless claims number, coming in at 6.6m which was more than double expectations – and came on top of the 3.3m filed last week. That is, nigh on 10m people losing their jobs in the past two weeks alone in the United States. These are depression level job losses. It’s payrolls day Friday, but the numbers will miss most of the March related lay-offs, so will have little bearing as to the current stressed state of affairs.

Equities wavered on the news but then moved higher! The US markets stayed volatile through the session and any gains looked temporary and tentative. In Europe, we followed in their broad path before giving up t0 close just o.3% – 0.5% higher, with US markets around 1.4% higher at our close.

Oil reacted to push 20% higher on hopes of a supply deal between the major producers, pushing WTI, for example, to around $24 per barrel.

In rates, at the European close the benchmark 10-year Bund yield had edged higher to -0.44% (+3bp), the Treasury a little lower to 0.61% (-3bp) and the yield on the Gilt closed at 0.33% (+2bp), all in a fairly directionless market.

The iTraxx indices moved higher with iTraxx Main at 108.5bp (+5.5bp) with X-Over 612.5bp (+11bp).

In cash, some respite. IG secondary was unchanged with the iBoxx index at B+251bp and this index has barely moved from the wides seen a couple of weeks ago (B+260bp) as the supply has kept a lid on any chance of a material level tightening. The sterling market has been doing a little better however, the index at G+254.5bp (-3bp) and 20bp in a week.

In the AT1 market, we had similar calm and we were also roughly unchanged with the index at B+1150bp, registering scant movement over the past week. The high yield market closed with the index at B+775bp (-8bp). These are all good signs.

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.