12th June 2018

Change should be coming

iTraxx Main

72.1bp, +0.9bp

iTraxx X-Over

306.3bp, +5.2bp

🇩🇪 10 Yr Bund

0.49%, unchanged

iBoxx Corp IG

B+127.4bp, -1bp

iBoxx Corp HY

B+376.1bp, -3.5bp

🇺🇸 10 Yr US T-Bond

2.96%, unchanged

🇬🇧 FTSE 100 [wp_live_scraper id=”4″], [wp_live_scraper id=”5″] 🇩🇪 DAX [wp_live_scraper id=”12″], [wp_live_scraper id=”13″] 🇺🇸 S&P 500 [wp_live_scraper id=”15″], [wp_live_scraper id=”16″]

Time to step out of the comfort zone…

Trump hit it out of the park, or he should have, but we were too light on detail. There’s a long way to go, the North Korean regimes past have got form in reneging on deals. But this could be the start of something new and we should give it all the benefit of any doubt. As such, there was a strangely subdued reaction in the market to the news. Probably because we didn’t get too much detail but we had much other news flow to think about.

We also had the debate and voting on the EU Withdrawal Bill in the UK, with the government having to contend with a ministerial resignation in the process. The liberalists in the establishment are putting up a stern fight on both sides of the Atlantic.

It was worth reflecting also on the decline in vehicle sales for BMW with 10% or more drops in Germany and China in May. And the important ZEW economic sentiment survey in Germany for May fell deeper into the red, to -16.1. It was last at this level back in 2012 at the height of the Eurozone crisis. There’s no crisis (yet) of the same magnitude we had back then. But it seems we’re getting a sustained slowdown in activity with the threat of Italy becoming the latest and most difficult to handle bad boy of EU harmony amid worries that the trade war will spiral out of control.

Confidence appears shot. We’re treading water. Waiting. One of the biggest geopolitical concerns often cited as a risk to global macro/confidence/investment is, for now at least, off the ‘danger monitor’ and the headlines will be more positive around it through the summer months. The aforementioned factors will come to the front of the queue and have a stranglehold on how markets develop and play out through the summer months.

All being told, it’s difficult to see how – or even why, risk markets should rally in any meaningful way. The Italian government is yet to demand anything from the EU while the migrant issue on Monday could be seen as a warning shot to the Brussels elite. We think there’s much still to happen here. As for the trade tariff situation, it seems like the US President has a bee in his bonnet regarding the G7 and Canada in particular. As he disrupts the post-World War II established order, we should all anticipate that change is coming on the economic and geopolitical fronts.

That means keeping it close to home. Small wonder equities have barely done much of late, rate markets have seemingly found new (lower’ish) ranges and the corporate bond market is just going with the flow – not much primary, barely any secondary activity and usually a little wider in spread. That’s probably the June to August months in a nutshell.

Primary waits the Bayer deal

While we await that blockbuster Bayer deal (possibly on Wednesday), OMV and ManpowerGroup stepped into the breach to keep us warmed up and ticking over. In fact, they did better than that with a couple of deals which were well-received, hitting sweet spots for investors. For instance, ManpowerGroup garnered orders of €3.2bn for a €500m 8-year maturity transaction priced finally at midswaps+100bp versus initial guidance of midswaps+125-130bp. That was good going for the borrower as well.

As for OMV, the Austrian borrower went for a PNC6 hybrid structure. The €500m deal was priced to yield 2.875% which was some 37.5bp inside the opening guidance of 3.25% – although the book at final pricing was €500m lower at €1.2bn. Once again, the day’s two offerings still illustrate how well demand for new debt is holding up (deals are generally cheaper admittedly at the moment), even if secondary continues to splutter. The stage is set for Bayer.

The €1bn of issuance in the session took the IG non-financial supply for the year to date passed the €100bn level, finally. It’s the lowest run rate since… the Eurozone crisis-related drought in 2012.

The other deal of note came from Groupe Bruxelles Lambert which took senior funding of €500m in a 7-year maturity at midswaps+130bp.

US domestic data points to a rate hike

Trump will be getting many of the plaudits on the international front, but he will also want to glean some on the domestic one. The Fed is well on the way to normalising interest rates and will be emboldened after consumer prices rose by 2.8% in May year-on-year, the highest rate since… yes, 2012!

US Treasuries didn’t really react and yields were already higher before that consumer price index data was released. That rise in yields was faded and we closed unchanged with the 10-year yield at 2.96% while the 10-year Bund yield was also unchanged at the close at 0.49%. Even in the UK, the rate moves were extremely modest, the yield on the 10-year eventually unchanged too, higher at 1.40%. It was a quieter day for BTPs as the 10-year edged 3bp higher to 2.88% although there was much focus on a successful 2-year auction where the yield pre/post (now costing 0.55%) election on the new fundraising differed by some 90bp!

Equities closed the session doing very little – either a very small up or down, probably a little hesitant ahead of Wednesday’s FOMC rate call.

Synthetic credit also moved higher with Main adding 0.9bp to close at 72.1bp having been lower earlier in the session, and X-Over moved similarly, left at 306.3bp at the finish (+5.2bp).

In the cash market, we eked another day better bid and left the euro-denominated IG iBoxx index at B+127.4bp at the close. We’ll take that against the backdrop of a market elsewhere giving credit little directional push. We’re still 30bp wider year to date with returns at -1.8% YTD. Ooops. And in high yield, amid little activity, the market was a little better, the index closing at B+376.1bp (-3.5bp).

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.