24th September 2020

🗞️ Champing at the bit

iTraxx Main

61.6bp, +3.8bp

iTraxx X-Over

356.8bp, +25.8bp

🇩🇪 10 Yr Bund

-0.51%, -1bp

iBoxx Corp IG

B+128.8bp, +2.5bp

iBoxx Corp HY

B+482bp, +13bp

🇺🇸 10 Yr US T-Bond

0.66%, -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″]

Small mercies…

The anticipated rout didn’t come. After the weaker close in the US the previous day, European markets opened on the back foot but really did manage to limit the downside. There was some distraction from the UK Chancellor’s statement in the Commons, while markets attempted to latch on to the better than expected news coming from business surveys in France and Germany.

In credit, the investor focus for the session was medical device maker Medtronic. The US borrower didn’t disappoint and even added a sixth tranche to its mega jumbo deal. Despite this Herculean effort by Medtronic, the size of the deal still failed to get us over the line. That record supply – for any year in IG non-financial corporate issuance – will have to wait. Until next week.

Medtronic either played it smart, or had the full benefit of a slower than expected corporate issuance dynamic of late. There is demand for paper, sidelined cash is growing and investors are in that ‘coming to end of the year’ period where portfolio balances need to be run down. Whatever, the Medtronic treasury department was full-on. In June 2019, they took €4.75bn in four tranches. This time, €6.5bn was taken out of the market in six tranches.

Chanel‘s sustainability-linked offerings have had plenty of attention of late too for the ‘green’ credentials it offered.  They pulled the trigger on a couple of tranches, while Norwegian state-owned group Avinor also printed. Czech property company CTP was the other IG corporate borrower, also coming with a green issue.

Overall, the markets are treading water. There is a hesitancy to pile in (to equities), credit spread tightening has stalled as equities stutter and confidence in a sustainable macro recovery ebbs. Central bank action is coming but the timing of it is uncertain and few are willing to front-run it. That’s because the headwinds are considerable and better entry levels are more than likely.

Eyes on the prize

First out was Chanel with €300m in a long 5-year at midswaps+95bp and €300m of a long 10-year at midswaps+125bp. Both tranches were priced 25bp inside the initial guidance and books were up at a combined €1.65bn.

Avinor issued €500m in a 10-year at midswaps+110bp which was 40bp inside IPT off investor interest pitched at €3bn. And CTP printed an increased  €650m in a 5-year maturity green bond at midswaps+260bp (also -40bp versus IPT, books around €2bn).

However, Medtronic was the big one in the day. As stated, they issued €6.5bn in total. The newly added 2.5-year was for €1.5bn at midswaps+45bp. The other five tranches were all for €1bn each. The 5-year was priced at midswaps+55bp, the 8-year at midswaps+75bp and the 12-year at midswaps+90bp. The 20-year cost them midswaps+140bp and the 30-year midswaps+175bp. Final pricings were 20 – 30bp tighter versus the initial guidance levels and combined books came in at over €19bn.

The total year to date for IG non-financial issuance now comes in at €315.7bn and we are just €2.4bn of volume away from setting a new annual record. For the month to date, we have seen €38.55bn of issuance, the second-best September since 2014.

In the high yield market, iQera (Louvre Bico SAS) priced its €200m 4NC1 structure to yield 6.5%. So that took the monthly high yield issuance volume to €7.9bn and to €61.2bn for the year so far.

Another €15bn – eminently possible – and we have another record year for HY issuance. Who would have thought?

Method in all the madness

Potential chaos, or rather a high level of uncertainty, continues to plague the markets as we enter the crucial pre-US election period. Political risk is heightened, for example, by Trump refusing to commit to an orderly transfer of power (should he lose). Mail-in voting and fraud issues resulting from it, and the need to get a Supreme Court judge in the vacant seat are on his radar. Those debates, starting next week, are going to make for compelling viewing.

Anyway, during the European afternoon session, markets were playing to the tune of the US markets – which themselves were trading in a narrow range. US continuing jobless claims were essentially unchanged versus August and just a touch higher than expectations.

The FTSE closed 1.25% lower and the Dax was 0.3% down at the finish. As at the European market close, the S&P was 0.4% higher and the Nasdaq up 0.9%. These are choppy markets and habitually end another 1-2% higher or lower.

In rates, the Gilt yield in the 10-year benchmark was unchanged at 0.22%, the Bund was yielding -0.51% (-1bp) and the Treasury 0.66% (-1bp).

For once, there was some clear daylight between equities and credit, the latter underperforming. Nerves? Credit index gapped as the cost of protection rose by 3.8bp for the Series 34 iTraxx Main contract to 61.6bp, and 25.8bp for X-Over to 356.8bp.

In cash, we saw some weakness which left the IG iBoxx index 2.5bp wider at B+128.8bp wide, while the AT1 market took a 32bp hit to leave the index at B+684bp at the close. The run through into other high beta assets saw the high yield index 13bp wider at B+482bp. Ouch.

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.