8th January 2019

Be good if it lasts…

iTraxx Main

85.8bp, -2.7bp

iTraxx X-Over

345.2bp, -12.1bp

🇩🇪 10 Yr Bund

0.23%, +1bp

iBoxx Corp IG

B+180.6bp, +1bp

iBoxx Corp HY

B+526bp, -10bp

🇺🇸 10 Yr US T-Bond

2.71%, +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″]

Market feeling replete…

Few will find reason to argue, but Tuesday’s session was a bullish one for the most part. And just as it needed to be, as it allowed the high yield primary market to reopen with a blue chip (offshoot) entity of a peripheral company. Just as we called it – and Telecom Italia Mobile was the borrower. Primary was raining deals again, with IG non-financials seeing a multi-tranche, dual currency effort from Orange SA, a dual tranche from Emerson Electric and then several senior financial offerings. All being told, primary is delivering but we are not sure it is being necessarily helpful.

The deals are cheap but there is a repricing impact and what’s more, the deals are not nailed certainties to tighten on the break. The market is a little dysfunctional at the moment and needs little more time to play out. So, there is not much – if any – performance in the new deals, while existing holdings are marked much wider thus hammering net asset values.

That means, we need sentiment to continue to improve and look like we have turned the corner and seen the worst of the macro/geopolitical-related volatility. The returning confidence will help secondary stabilise, primary tighten on the break and then secondary tighten too – more consistently. That is, a moderately bullish or normal market dynamic.

We’re not getting sucked in yet. The trade talks between the US and China are ongoing and it wouldn’t take much in terms of headline risk to see equity markets drop 2%. The macro data is still generally showing us that the slowdown in Q4 will continue through Q1 at least. Tuesday’s German industrial production report that November saw a drop in activity by 1.9% from October against expectations of a rise of 0.3% – and down 4.7% year on year highlights the Eurozone’s (growing) problems.

Brexit-related headline risks are not fooling anyone but the equity markets. Hopes of a trade deal inject some optimism for example, but usually the next headline ‘taketh away’. Credit markets are too illiquid to react with any obvious enthusiasm, and so they usually don’t. In a sense, credit has a natural smoothing mechanism to all the noise!

New issue market effusive again

It’s good, but let’s not get too carried away, admittedly this is a good effort from the primary market – but that is usually the case so early in the new year.

Orange SA took €3.15bn in three euro-denominated tranches comprising a 3-year €650m lift at midswaps+55bp (-15bp versus IPT) and a 5.5-year deal for €1.25bn priced at midswaps+85bp (-15bp versus IPT). Their final tranche was a 10-year maturity for €1.25bn at midswaps+120bp and also priced 15bp inside the opening guidance. The final pricing was around 20bp versus the secondary curve (naturally repriced), and the book came in at a combined €11bn or so.

The borrower also took £750m in a 13-year effort, priced at G+180bp (-10bp versus IPT). That’s a rarity in itself these days, the last IG non-financial corporate delay back in November. The other IG non-financial deal in the market was a dual tranche from Emerson Electric. The US utility issued €500m at midswaps+90bp for a short 7-year maturity which was 20bp inside the initial guidance and took another €500m in a short 11-year at midswaps+120bp (also -20bp versus IPT).

Telecom Italia Mobile: €1.25 bn in a 5 year deal

The two euro-denominated deals saw €4.15bn issued and takes the total so far this month to €6.15bn – which is much better than we might have expected.

In financials, Allianz lifted €1.5bn in a two-tranche deal split equally between 7-year and 11-year maturities at midswaps+50bp and midswaps+65bp, respectively. Senior bank deals came from ABN AMBRO Bank which also did two tranches for €1bn (2-year floater, Euribor+30bp) and €1.5bn (5-year,midswaps+78bp). And we had BPCE come in senior preferred format for €1.25bn in a 5.5-year maturity costing midswaps+86bp. That’s €7.5bn in just two sessions in senior bank issuance.

The Telecom Italia Mobile deal saw €1.25bn issued at 4.125% in a long 5-year garnering a book at an excellent €4.5bn (-25bp versus IPT). And it is worth mentioning that Belgium piped up with a whopping €6bn of its own, in 10.5-year maturity offering at midswaps+10bp (just -1bp versus IPT).

Rally fades touch

Equities had another good day – for the most part. It’s a good habit to get into. The problem is that it won’t take too much to derail the current effort. Still, we will take it. It means confidence has a good chance of returning. Unfortunately, the good earlier gains were faded into the close as US equities moved into choppier climes again.

Still, the Dax closed 0.5% higher, the FTSE 0.75% (on Brexit hopes, of course) while the S&P was up just 0.5%, as at the time of writing. There was some trade optimism around as the US/Chinese talks dragged into a third day.

Rates edged higher as safe-havens were better offered amid the slightly improved tone. The 10-year yields closed as such: 0.23% for Bunds (+1bp), 1.27% for Gilts (+1bp) and 2.71% for US Treasuries (+3bp).

And that improved tone pushed the cost of credit protection lower some more, the third such session the bounce. Main was 2.7bp lower at 85.8bp and X-Over dropped 12.1bp to 345.2bp.

As suggested, there’s no kidding the IG cash market. We’re offloading into any improved (or otherwise) bid. IG cash edged wider, the iBoxx index left at B+180.6bp (+1bp) – around 8bp wider this year already. Still, some were spotting an opportunity – as fleshed out on a previous report on this site, and the AT1 market saw some decent upside. The sector rallied, with the index 21bp tighter at B+711bp.

As for high yield, it followed the better sentiment which saw other high beta markets tighten, although activity was extremely light. The iBoxx HY index was 10bp tighter, at B+526bp.

Have a good day.

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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.