21st January 2020

🗞️ Hmmm, markets ready to go again

iTraxx Main

43.4bp, +0.4bp

iTraxx X-Over

211.1bp, +2.6bp

🇩🇪 10 Yr Bund

-0.25%, -4bp

iBoxx Corp IG

B+102bp, unchanged

iBoxx Corp HY

B+337.6bp, +4bp

🇺🇸 10 Yr US T-Bond

1.77%, -6bp

🇬🇧 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″]

As coronavirus spread dampens the mood…

The growing concerns around the spread of the new coronaviras which is sweeping through China are being felt in the markets. Should it be eventually be contained and managed as other Sars-like viruses have been, then market recoveries will be swift. Until then, headline risks will keep risk markets in a cautious mood. Equities came under some pressure although we managed to recover much of the losses, rates were seen better bid and secondary credit was unchanged with primary still printing a plethora of predominately financial issuance.

Busy credit primary markets are likely going to be the case through all this week. Once again, we observe that we have not quite seen the high levels of deal flow from plain vanilla non-financial corporates that most investors have been anticipating. Nonetheless, demand for the deals on offer is at very high levels and this is going to be sustained through the first quarter.

Not that we are cheerleaders for institutional IG non-financial corporates, but that pent-up investor demand is good news for borrowers. The market is in excellent shape and receptive. Deals dynamics are unchanged compared to what we saw through most of 2018/9 – and set to stay that way for the foreseeable future if the plain vanilla corporate bond dynamics remained unchanged.

That is, 3x or more (usually) oversubscription – ‘more’ when it’s a higher beta offering (AT1/Tier 2 issues, for example), and pricing rammed tighter versus the initial guidance – just to make issuers and syndicates replete.

Yes, that game is still being played. And most deal are performing so on it will go. We have the perfect storm in a sense, which will be unaltered as the ECB’s first meeting of 2020 is comes up, as they’re not going to be changing anything as yet. News that corporate loan growth dropped for the first time in 6 years in Q4 across the region will keep the central bank on the defensive.

So we are into the second half of January, and investors are going to be happy with the current performance in the bag. It likely won’t be as plain sailing for the whole year, so building a buffer is always welcome.

The lack of deal flow has seen IG spreads finally move into positive territory after languishing at slightly wider levels, but the real gains have been in the AT1 market and the high yield market.

The iBoxx index shows the former 32bp tighter year to date and the latter 10bp, with sterling credit 6bp tighter and returning 2%. Sterling credit will have been boosted by calls for a rate cut by the BoE next week.

But just as last week’s reports showed that inflation remains subdued (it is actually falling) we did have job growth in the 3 months to November rise by 208k (expectations 110k) and real wage growth rose.

So a mixed picture in the UK and if that cut doesn’t come next week, the clamour will grow (we think) for a March cut. Either way, sterling credit stays better bid.

Financial issuance flurry continues

The senior financial issuance in the session came from KBC Group which issued €500m in a 10-year at midswaps+65bp (-20bp versus IPT) and Lloyds Bank Corp markets for €750m at midswaps+55bp (-15bp versus IT) in a 5-year.

After issuing Tier 2 debt just last week, Monte Dei Paschi’s market recovery continues as it was back for €750m in a long 5-year senior deal costing them midswaps+285bp (just -15bp versus IPT). For this month so far, that’s €27bn of senior issuance.

There was a sterling deal, with RBC issuing £350m in a Dec 2025 maturity at G+83bp. The Tier 2 offering came from Jyske Bank, although for just €200m in an 11NC6 maturity priced at midswaps+145bp which was 20bp inside the opening talk, with books at €550m.

The other deal of note came from Fastighets AB Balder, a Nordic real estate group, which issued €300m in an 8-year at midswaps+130bp (-35bp versus IPT, books €2.1bn).

The IG non-financial issuance flow was represented by FCA Bank, which issued €850m in a 3.1-year at midswaps+55bp. The book was up at €3bn and final pricing 20bp inside the opening talk. Still, that’s only a disappointing €15.1bn of issuance for the month so far, against €26bn for the whole of January last year.

And then there was a spate of sovereign deals. That was almost to be expected given the flurry of issuance seen from them already this year. This time it was Romania, Philippines and Chile in the euro debt markets. Romania printed a combined €3bn off a €9.8bn order book with €1.4bn in a 12-year (midswaps+180bp, -30bp versus IPT) and €1.6bn in a 30-year maturity at midswaps+285bp (also -30bp versus IPT).

The Philippines also issued in a dual tranche, with €600m in a 3-year and another €600m in a 9-year at midswaps+40bp and +70bp, respectively. Both were 25bp inside the opening guidance. For Chile, it was a €600m tap of the 2031s and €1,040m of a 20-year at midswaps+xxbp.

Mixed bag data/risk markets lower

Data generally was lighter, although the German Zew economic sentiment indicator rose to 26.7 from 15.0 forecast. Trump was incredibly ignoring climate and impeachment concerns in Davos choosing instead to talk up the US economy.

The IMF was cutting its global growth projections, down to 3.3% (from 3.4%) in 2020 and 3.4% in 2021 (3.6% previously), while suggesting that a post-Brexit Britain’s economic performance will outpace that of the Eurozone in both 2021 and 2022 (as it did in 2019).

So European equities ended in the red but off the session’s worst levels. The FTSE was 0.5% lower, the Dax ended flat and the €Stoxx50 around 0.3% lower. The US markets were back in negative territory, as at the time of writing.

In rates, there was a sustained strong bid which lopped 6bp off the 10-year US Treasury yield, as at the time of writing, to 1.77% while the Bund was yielding -0.25% (-4bp), and Gilts in the 10-year maturity saw yield fall to 0.63% (-2bp) at the close.

The iTraxx indices only edged a little higher with Main up at 52.3bp (+0.4bp) and X-Over 2.6bp higher at 211.1bp. In the quiet cash market, it was a case of reduced activity and keep it unchanged with the index at B+102bp. Likewise, the in-vogue AT1 market also closed unchanged (index at B+365bp) while the high yield index was just 4bp wider at B+337.6bp.

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.