8th October 2019

Boris’ Karloff moment

iTraxx Main

59.3bp, +1.3bp

iTraxx X-Over

259.7bp, +6.2bp

🇩🇪 10 Yr Bund

-0.60%, -2bp

iBoxx Corp IG

B+126bp, +0.7bp

iBoxx Corp HY

B+438bp, +7bp

🇺🇸 10 Yr US T-Bond

1.54%, -2bp

🇬🇧 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″]

Now we’re talking…

The focus totally should have been CK Hutchison Telecom’s six-part deal, with investors scrambling to get hold of the company’s debt even as Hong Kong’s troubles show no sign of abating – but markets were stumped. By Brexit. The latest had the markets in a tizzy as talks were said to have broken down (or close to breaking down) amid an apparently terse phone call between Merkel and Johnson. If true, we can now get on with it and on to the UK election, which will have ‘no-deal’ Tories pitched against a ‘we don’t know what we’re doing’ Labour Party and the ‘no-Brexit’ Liberal Democrats.

As expected, we had the usual reports of massive UK budget deficits in the case of a no-deal Brexit, sterling was rocked, Gilts were better bid and equity losses were more measured (weaker sterling helps) at the start. The Dax took a bigger hit, which we could expect given that the economy is already (or is likely) in recession and trade will only worsen if a no-deal Brexit duly materialises. It was a similar situation across other European bourses.

For the rest, it was back to credit primary markets with several interesting deals. For instance, Greece was back as it lifted an increased €1.5bn in a tap of the 3.875% 2029s, to yield 1.5% off a book in excess of €5.4bn. Also in the SSA space, Quebec issued €1bn in a 10-year at midswaps+13bp, with books for the deal at almost €2bn.

However, corporate primary was more effusive after the recent lull in activity. Alstom and PepsiCo joined Hutchison, while Santander and Shinhan issued in senior. As a result, IG non-financial corporate bond issuance, with deals once again printing at a decent clip, is heading rapidly towards breaking that record annual total of €285bn (2009). After Tuesday’s offerings, the total year to date has grown to €260bn.

Hong Kong’s Hutchison tops the primary pile

There was a decent premium for the Hutchison deal, but the amount they paid was a function of both HK event risk and the size of the transaction. Either way, the demand was massive (combined books for the euro deal of over €8bn) for the offering which was being used to principally refinance debt from its Italian mobile-phone unit, Wind Tre SpA.

So Hutchison issued €1.5bn in a 4-year at midswaps+90bp (-15bp versus IPT) and €1bn in a 6.5-year at midswaps+115bp which also was 15bp inside the initial guidance. They went for another €1bn in 9-year priced at midswaps+140bp and €750m in a 12-year at midswaps+160bp (both again -15bp versus IPT).

Deal for Santander

The group also took sterling funding, with two tranches, for £500m in an 8-year maturity at G+185bp and £300m at G+205bp in a 15-year offering, with both deals also 15bp tighter versus the initial guidance. Interest for the sterling deals came in at over £2.1bn.

Alstom issued €700m in a 7-year at midswaps+65bp, with books 3x subscribed and final pricing 25bp inside the opening guidance level. PepsiCo issued €500m in a no grow 20-year offering, priced at midswaps+70bp which was 20bp inside the opening mumble.

In senior financials, Santander Consumer Bank took €500m in a no grow senior preferred 5-year at midswap+68bp, as Shinhan Bank also issued €500m in a green bond at midswaps+70bp.

Mission (deal) impossible

The session had markets focused on the Turkey/the Kurds/Syria issue following Trump’s withdrawal of US forces from the specific region, but also the Brexit developments – as Downing Street suggested that a Brexit deal was essentially impossible. For good measure, there was continued nervousness about the state of the trade talks between the US and China. Equities fell.

US core PPI for September came in at -0.3% (month-on-month) versus expectations of 0.1% and 2% year-on-year (2.3% expected), the largest fall in 4-years.

Taken together, not such a good day newsflow-wise. The Dax gave up over 1% with similar losses elsewhere across the continent, as the FTSE lost 0.8%. US equities were also trading lower by up to 1%, as at the time of writing.

In rates, Gilts were better bid and the 10-year yield dropped to 0.41% (-4bp) – but is still 7bp away from the record low print. The equivalent maturity Bund yield was left at -0.60% (-2bp) while in the US, the Treasury in the 10-year was yielding 1.54% (-2bp).

Secondary IG cash credit has barely moved this past month, just 3bp wider (iBoxx index) during this period. Activity has been light and investors have been focused on the primary market. While markets elsewhere have been volatile, it would seem that IG markets are being supported by the ECB’s upcoming QE programme.

There has been some weakness in high yield markets, but even here it has been very small. The index has moved wider but by barely 25bp during the last 4 weeks, which really just reflects the volatility in equities – with which high yield spreads are highly correlated.

Anyway, in Tuesday’s session, the focus was on primary but cash looked slightly better offered emerging from low volumes and weaker equities. The IG iBoxx index closed at B+126bp (+0.7bp) and the AT1 index just 4bp wider at B+517bp. In high yield, the index ended at B+438bp (+7bp).

Credit index closed higher, Main closed at 59.3bp (+1.3bp) and X-Over at 259.7bp (+6.2bp).

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.