21st November 2017

America, leading the way

iTraxx Main

49.8bp, -0.8bp

iTraxx X-Over

240.1bp, -3.3bp

10 Yr Bund

0.34%, -2bp

iBoxx Corp IG

B+100.6bp, -2bp

iBoxx Corp HY

B+285bp, -1.9bp

10 Yr US T-Bond

2.36%, -1bp

FTSE 100 [wp_live_scraper id=”4″], [wp_live_scraper id=”5″] DAX [wp_live_scraper id=”12″], [wp_live_scraper id=”13″] S&P 500 [wp_live_scraper id=”10″], [wp_live_scraper id=”11″]

The winds of change…

The positive start to the week continued through Tuesday’s session led by stocks. Primary credit was busy delivering a whole bunch of deals while secondary was also slightly bid. Rate markets were better bid as well as yields declined on a combination of a poor UK government borrowing number for October, the ongoing and yet intensifying Brexit situation and then the German political scene where (as things stand) another election is the most likely outcome.

So while risk asset prices rise, there seems to be an air of concern in the market, perhaps fear in some quarters with a view that we will soon be battening down the hatches into some sort of crisis. Germany’s inability to form a government around the CDU (Angela Merkel) has kind of crept up on us, and is just the latest in a long line of hurdles which the market hitherto has brushed aside on its way to setting all kinds of record levels in credit and equities.

There must be some year-end nerves in there somewhere, too, with investors looking to protect their booty amid some fantastic levels of performance. In credit for sure, we have exceeded the most bullish of expectations. How this market makes money when we reset the tiller to zero come January is anyone’s guess (it probably won’t), but for now, the cash is flowing in and looks for a home in what has been an extremely accommodative November primary market.

Richer secondary seems to be the preserve of the ECB which continues to lift paper with scant regard for value, on a mission to squeeze the market and investors into lower rated, riskier debt in order to oil the disintermediation funding transmission mechanism.

They’ve succeeded supremely well – too well perhaps, because investors are longer than they would or ought comfortably wish to be. IG portfolios are rammed with HY debt, or rather a higher portfolio beta position than one would like. But for now, there is comfort in the performance levels where both benchmarked and total return managers have delivered. One or both will lose out next year, that has to be the case. Duration is not going to be our friend but growth might be for benchmark players if spreads can stay in small rangebound levels.

Primary still churning them out

There was a flurry of deals in the corporate bond market with something for every sector, but not enough to satiate investors. Demand for primary risk was very, very strong. For example, Nordea managed to reduce the initial guidance by 0.5% of their CoCo deal as they garnered a book of over €6bn for a €750m deal priced to yield 43.5%. That’s a great deal for Nordea and highlights the clamour for higher yielding debt (admittedly, Nordea is a top-quality institution).

On the other hand, Sudzucker  (rated triple-B) only reduced the initial guidance by 5bp, for an 8-year priced at midswaps+50bp with the book only above €700m. Perhaps a name only for accounts with a particularly sweet tooth?

Staying with financials for the moment, Credit Logement priced a €500m 12NC7 Tier 2 offering at midswaps+90bp and Landsbankinn HF took €300m in senior funding in a 5.5-year maturity at midswaps+95bp. Danske Bank issued €750m in a 5-year at midswaps+14bp. In sterling, we had NAB for £250m in senior funding. Spanish Reit Inmobiliaria Colonial Socimi issued €880m combined in two tranches while Italian bancassurance company Unipol Gruppo issued €500m in a 10-year at midswaps+270bp.

Adding to the Sudzucker deal, we had Renault print €750m in an 8-year at midswaps+53bp – some 22bp tighter that the initial chatter, off a €2bn book. The two deals were issued at exactly the same level and Sudzucker has a slightly higher rating. Renault probably benefits from being a ‘better’ recognised name, a more frequent issuer and likely a better level of domestic support.

Finally, McDonald’s issued €1.2bn combined off a dual tranche effort, priced at midswaps+30bp (long 6-year) and midswaps+57bp (12-year) reducing the opening price talk by 15bp and 8bp, respectively. Overall IG issuance is now up at €26bn this month, versus €28bn last November and against €40bn for November 2014.


The US is back

There were no jitters in US markets. Equities there saw new record highs being set in the session for the Nasdaq and S&P500, while the Dow wasn’t far off the same achievement. Symbolically, the S&P crossed 2,600 for the first time ever. We’re not sure what the catalyst was for it, but the rise is always most welcome. Nor were there were any politically-induced woes in German equities, with the Dax flying, higher by 1% as we had a positive equity markets across the board.

There was, however, also a better bid for duration. That did fade a little as equities rose, but still we were left with benchmark 10-year yields for Gilts at 1.27% (-3bp), Bunds at 0.34% (-2bp) and UST at 2.36% (-1bp). At 98bp, the US 10-year 2s/10s is the flattest its been since before the financial crisis began! Recession on its way? Or just a receding risk of higher inflation? Or both? The periphery outperformed, with Spanish Bonds yielding 1.48% (-4bp) and the yield on the 10-year BTP also dropping to 1.77% (-4bp).

In credit, the rising tide in equities cut the cost to ensure credit, and the synthetic markets, reacted to close lower. iTraxx Main was down at 49.8bp (-0.8bp) and back through 50bp for the first time in a couple of weeks, while X-Over protection fell 3.3bp to 240.1bp.

In cash, the Markit iBoxx IG index was left just 0.2bp tighter at B+100.6bp highlighting the inactivity in the secondary market. Still, the better tone in the stock market helped the Street push the CoCo market a little tighter – the Nordea deal helped too – and that index dropped to B+386bp (-7bp) and 30bp off the very recent wides of last week – but still 35bp off the record tights!

And last, but not least, the extremely perceived rich high-yield market was in recovery mode (from the recent weakness), such that the index was left almost a couple of basis points tighter at B+285bp. There was no supply and little secondary flow.

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.