2nd April 2019

Lunatics, asylums and the EU27

iTraxx Main

62.8bp, +0.5bp

iTraxx X-Over

258.8bp, +0.1bp

🇩🇪 10 Yr Bund

-0.05%, -2bp

iBoxx Corp IG

B+136.6bp, -0.6bp

iBoxx Corp HY

B+xxxbp, -+xbp

🇺🇸 10 Yr US T-Bond

2.49%, unchanged

🇬🇧 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″]

Surely, it really IS that simple…

The market seemed like it was treading water, shell-shocked in a sense by the overnight news that Westminster failed to agree a single majority on the Brexit-related indicative votes. A deal can still happen – if the EU cedes on the Withdrawal Agreement and we all work together over the implementation period to work out a solution to the border issue. Like reasonable adults and friends with a purpose. Otherwise, it’s no-deal, a general election or a fourth vote on the existing deal. Alas, we’re back at square one. We did manage a risk-on session and credit primary was busy with a good handful of deals which were again very well received. With most deals performing well on the break (90%+ deals this year tighter), the market’s confidence is high and borrowers might be best advised to make hay.

Including Tuesday’s offerings, the IG non-financial deal total for the year comes in at €89bn from 107 individual tranches (average size €830m per tranche). That compares with €55bn in the corresponding period last year from 74 tranches (average €743m), leaving the current run rate on course to reach somewhere in the region of €250bn for the full year’s total.

The high yield market hasn’t at any stage threatened to break out of its issuance malaise and come up with just €11.5bn of issuance so far this year, versus €19bn for the same period in 2018. There has been scant sign of late that we might start to see some thawing in this market, but the borrowers on the tapes are those which typically would attract an IG crowd (Volvo, Elis SA and the LafargeHolcim hybrid).

There is some hope there that supply weakness has helped to prop secondary in this market, just as we might think it ought to be under some pressure as the macroeconomic storm clouds gather. Spread have tightened by 100bp (!) this year and total returns are up at a massive 5.75% year to date. Who needs a better functioning primary market?

Primary still churning out the deals

Verizon was the headline deal of the day. The US telecom giant issued €1.25bn in an 8-year at midswaps+63bp which was 17bp inside the opening guidance and took a further €1.25bn in an 11-year offering priced at midswaps+75bp which was 25bp inside the opening talk. They also issued £500m in the sterling market in a 12-year maturity at G+143bp (-17bp versus IPT).

The other IG non-financial borrower was ABB, which gave investors the opportunity to park up some cash in short-dated cash, as they took €1bn in a 1.5-year floater format costing Euribor+18bp (-12bp versus IPT, books in excess of €2.5bn).

After Holcim’s high yield rated hybrid deal on Monday, investors are becoming spoilt a little. French laundry services group Elis SA lifted €500m in a 5-year deal costing them 1.75%, but that was 50bp lower than the initial price talk made possible with the book up at a whopping €3.75bn.

Financials were represented by DNB Bank’s senior non-preferred €750m 5-year deal costing midswaps+30bp and NIBC’s senior non-preferred €300m offering which was priced at midswaps+200bp. The former managed a book of just €1.1bn whereas the higher beta deal from NIBC attracted a book of €1.9bn. Volksbank Wein issued in the AT1 market with a €220m PNC5 issue with a 7.75% yield.

In the insurance space, MetLife Global issued €1bn in a 5-year at midswaps+38bp (-22bp versus IPT, demand of €3.25bn) and we had Blackstone issue an increased €600m in a 10-year at midswasp+105bp (-15bp versus IPT). Slovakia was the latest sovereign in the market as it visited for €1bn in an 11-year maturity at midswaps+21bp.

12th of April can’t come quickly enough

Equities were up likely on weaker European currencies (versus the dollar) as the data-driven rally from Monday at times appeared to run out of steam. Rates were tentatively better bid to start and then gathering some momentum later, and yields pushed lower again as a result. Credit was better bid for choice in secondary with investors running down their cash holdings on the decent flow of deals on offer in primary in the day.

So as we get closer to the April 12 deadline and few seem like they are going to yield – and with EU 27 heavyweight leaders like Macron and Merkel failing to take any leadership, the no-deal threat rises. Gilts were back yielding 1.00% (-4bp) in the 10-year benchmark, while the equivalent maturity Bund was back down to yielding -0.045% (-2bp). The two-day Treasury rally also ran out of steam, leaving the 10-year yield 2.49% (unchanged).

The FTSE up 1%, the Dax was adding another 0.6% and the US markets were flat/slightly negative as at the time of writing, following a weak durable goods orders report for February where the biggest drag on them came from the 31% drop in aircraft orders. In addition, three of the largest automakers in the US (Fiat, GM and Toyota) reported a decline in Q1 new vehicle sales by 3%, 7% and 5%, respectively.

Credit protection costs barely moved in the session, having had some big moves in the previous session. Main closed at 62.8bp (+0.5bp) and X-Over at 258.8bp (unchanged).

As for secondary cash, the market squeezed some more and that left the iBoxx IG cash index at B+136.6bp (-0.6bp) with returns up at 3.4%. The AT1 market closed unchanged. In the high yield market, it was a similar story but the squeeze took the index 5bp tighter to B+423bp.

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.