13th November 2018

Brexit ‘deal’ excitement steals the day

iTraxx Main

71.0bp, -0.8bp

iTraxx X-Over

293.8bp, -0.5bp

🇩🇪 10 Yr Bund

0.41%, +2bp

iBoxx Corp IG

B+146.4bp, +2bp

iBoxx Corp HY

B+436.7bp, +6.7bp

🇺🇸 10 Yr US T-Bond

3.15%, -4bp

🇬🇧 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″]

But it’s getting more difficult to stay upbeat…

So market bounces are an opportunity to reduce risk, it seems. Well, at least few are going to add on any dips or chase the market higher if it looks like it might start to feel better. We’ve been had by too many suckers’ rallies of late and this close to year-end, it’s wise to protect performance now. So we have a situation where secondary market turnover and volumes are going to stay at depressed levels. There is no point in moaning about secondary liquidity because there is none – and it will not be returning any time soon.

That leaves primary credit as investors’ best opportunity for getting some debt on board, but the Volkswagen offering might have reset the bar too high for borrowers who might gawp at the new issue premiums needed to get a deal away – whatever the size. Unless, of course, we get a price insensitive mega M&A deal (re-)financing on the screens. Takeda Pharmaceuticals, we’re watching!

We’re hoping that the week’s excitement might just not have passed. That 6-part VW deal on Monday likely won’t be it, unless Takeda pulls the trigger. Still, VW paid up for the size and having executed in dollars and sterling, and has more than likely got enough funding done to take them through the March 29, 2019 Brexit deadline -Assuming that was the motivation for the deals. Away from that, we had some deals in the market on Tuesday, but as we head into the second half of November, there is already a year-end feel to the credit market.

Fatigue has set in everywhere. After all, there’s immense pressure on the UK government on Brexit (see below), we’re awaiting Italy’s official response to EC demands for them to ‘re-submit an ammended’ budget with the deadline being Tuesday, and we had the ZEW report for October confirming fears that there is no quick fix for the current slowdown in the German economy – and by extension, the Eurozone one.

Oil prices are still dropping, with Opec forecasting over supply in 2019 as well as a few choice words from Trump leaving Brent at under $68 per barrel (-4%) having nested at well above $80 per barrel less than a month ago. There will be inflation implications in due course and maybe some hope that central bank tightening (especially in the US) could be less aggressive. Here’s hoping, anyway.

Nursing our way to year-end

Taking each session as it comes, Tuesday’s was a moderately better one. Equities traded out the session in the black without really showing much conviction until a late Brexit-motivated surge late on, duration was mixed and credit probably only a touch better bid.

Equities had displayed little conviction to move anywhere but news of a UK/EU provisional Brexit agreement (needing still to be scrutinised by respective lawmakers) left a choppy Dax eventually managing to put on +1.3% – and back into positive territory for the month in the process. US markets were mixed and playing out in a +0.5% to -0.3% range depending on the index (tech up, energy down, industrials flattish), before closing in the red – just.

In rates, Gilt yields rose with the 10-year up at 1.50% (+5bp), Bunds were up a couple of basis points yield 0.41% in the same maturity, while GE concerns (CDS north of 200bp, +20bp) likely added to a bid for Treasuries, the 10-year yielding 3.15% (-4bp) at the time of writing. There was also a late surge in sterling, taking the currency through $1.30.

The IG non-financial deal flow was confined to Eastern European borrowers. Czech utility CEZ printed an increased benchmark €500m in a 4-year at midswaps+70bp which was 15bp inside the opening guidance. And Gazprom took €1bn in a long 5-year LPN at 2.95% yield. Otherwise, we had Swedish real estate group Castellum AB inaugural €500m offering at midswaps+180bp in a 5-year maturity off a book of €1.1bn, still allowing for the final pricing to be reduced by 15bp versus IPT. So IG non-financial issuance is up at €202bn for the year to date, after a now sprightly €13bn for November at just about the halfway stage of the month.

In financials, it seems like a while since we had a Tier 2 offering. BNPP piped up with a 12NC7 structure for €500m priced at midswaps+185bp with a book of around a lowly €700m. The rest was covered and SSA issuance.

The recovery in the synthetic credit indices was modest, to say the least. They were not getting carried away with anything, which left Main just 0.8bp lower at 71.0bp and X-Over just 0.5bp lower at 293.8bp.

In secondary cash, we moved wider and that left the iBoxx IG cash index at B+146.4bp (+2bp) and which is now 4bp wider in just two sessions this week. The index is also at its widest level since July 2016. It was a similar story in high yield, as we would expect, with the index up 6.7bp to B+436.7bp.

Wednesday will be dominated by the Brexit developments.

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.