10th November 2019

Buy the dip opportunity

iTraxx Main

49.2bp, +0.9bp

iTraxx X-Over

233.8bp, +2.5bp

🇩🇪 10 Yr Bund

-0.26%, -2bp

iBoxx Corp IG

B+109.4bp, +0.5bp

iBoxx Corp HY

B+385bp, +2bp

🇺🇸 10 Yr US T-Bond

1.94%, +1bp

🇬🇧 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″]

Keep believing, for now…

The sell-off in the underlying has presented credit market investors with a near-term buying opportunity. It will keep spreads supported into year-end, although we are likely going to see an impact on total returns in low beta sectors of the credit market. No sweat. Given where the numbers are in credit so far this year, there is enough of a buffer to ensure that we close out far in excess of the pitch made to investors when we started the year. 6.2% total return in IG (iBoxx)? Not bad at all. 14% from the AT1 market – that’s excellent. And what about 9.1% in a high yield market that was supposed to feel the pressure from macro weakness? We think that there is a little more upside to those numbers to be had before we close up in 2019.

The medium-term paints a more onerous picture. A trade agreement would represent short term boost (to sentiment if nothing else) and that is just what markets are trading now. However, an agreement of sorts only stems the rate of decline that we’re seeing in global macro. That is, a trade deal does not (necessarily) act to bolster growth. The global growth environment is heading weaker anyway and a whole host of agencies (IMF etc) have been busy revising lower their global growth expectations for 2020.

Credit funds are nevertheless likely going to record decent inflows through the first part of 2020, as those inflows will be chasing 2019’s returns. And that money will need to be invested. So its seems likely that spread markets will be in decent shape through Q1 and Q2.

The rest of the year might well depend on where macro heads, the potential for a further rate unwind – or a continuation of it, single name event risk and or course, the direction of equities. So while the full-year 2020 is difficult to predict, we should nonetheless roll seamlessly into Q1 much the same way we end 2019.

No rest for primary

The issue dynamic continued to churn out deals in last week’s final session. The demand and tightening of deals versus the initial guidance showed absolutely no sign of letting up, either.

US group Zimmer Biomet issued €500m in an 8-year at midswaps+115bp and though final books were not disclosed, the final price was 40bp inside the opening guidance. The borrower probably benefited from being a new name in the euro debt market and the opening guidance was pitched wide to account for an element of price discovery.

€500m deal for Bureau Veritas

Bureau Veritas was the other IG non-financial corporate borrower – although the issuer is unrated. They lifted €500m in a no-grow long 7-year at midswaps+125bp. Books came in at €2.2bn and final pricing was 35bp inside the opening mumble.

The pace of senior financial supply shows no sign of slowing, and this time had RBS issue €750m in a social bond with a 6NC5 maturity structure, at midswaps+100bp (-20bp versus IPT, books at €2bn).

So, the IG non-financial YTD total rose to €288.4bn and is likely going to pass the €300bn mark for the first time in history easily before the Thanksgiving slowdown. For the opening week of the month, the total is at €10.5bn.

The high yield market finished the week off with Peach Property Finance’s €250m 3.25NCL deal, priced to yield 3.75%.

Someone speaketh with fork tongue

Equities in the US struggled for most of the session to display the same gung-ho move higher and further into record territory, their potency dimmed somewhat after Trump said that he had not agreed to roll back tariffs on Chinese goods. That after officials in both camps (previously) had suggested that an agreement was in place.

However, there was some heavy lifting into the final part of the session and all three indices managed to close at fresh record highs. The S&P added a further 0.26%, the Dow just 6-points and the Nasdaq 0.5%. European markets closed up to 0.6% in the red.

Rates had a more stable session after the rout on Thursday. The bund yield in the 10-year ended at -0.26% (-2bp) and the US Treasury yield rose a basis point to 1.94%. The UK credit rating outlook from Moody’s was changed to negative (blame it on the Brexit) after the close with the 10-year yield a tough higher into the close at 0.80%.

We rowed back in credit index as well, with iTraxx Main a touch higher at 49.2bp (+0.9bp) and X-Over up at 233.8bp (+2.5bp).

As for cash, we ended the week giving back Thursday’s gains in a quiet session with the Streets direction gained from the direction of European equities we would think. After all, they had little else to go on.

So the iBoxx IG cash index closed a touch wider at B+109.4bp which was still 4bp tighter in the week and just 2bp from the tights recorded for this year. The AT1 index gave back the 7bp of tightening from Thursday’s session to close at B+445bp while the high yield market was 2bp lighter at B+385bp (but -22bp this month). There isn’t much going through at the moment in secondary, but we will get an idea of the ECB’s opening week’s QE efforts when they report their corporate bond holdings this week.

We have Chinese and Eurozone industrial production data due, UK and US inflation readings, the Fed’s Powell testifies on the economic outlook and recent bank actions, with German GDP for Q3 out on Thursday (expected to come in at -0.1%). On the same day, the preliminary Eurozone Q3 GDP print is expected to come in at 1.1%.

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.