13th September 2017

Consolidation – What else?!

iTraxx Main

51.3bp, -0.5bp

iTraxx X-Over

226.2bp, -0.5bp

10 Yr Bund

0.41%, +1bp

iBoxx Corp IG

B+109.6bp, unchanged

iBoxx Corp HY

B+292.5bp, -1.5bp

10 Yr US T-Bond

2.18%, +2bp

FTSE 100

7,380, -21


12,554, +29

S&P 500

2,498, +2

Midweek, chill time…

The markets spent the session on Wednesday in consolidation mode. That’s short for saying that there was little going on. Equities were playing out in a small range with a mixed performance. The safe-haven sector of the market (government bonds) was initially a little better bid as it tried to recoup some recent losses but ended slightly better offered.

In spread markets, sterling valuations have barely moved over the past four weeks with the Markit iBoxx cash index at G+135bp, even as Gilt yields have played out in a 20bp range in the 10-year maturity. It’s been a similar story for the euro-denominated IG market where the range on the index has been 6bp over the past month, with spreads at B+109bp at the moment (3bp wider in 4 weeks).

All three US stock market indices closed Tuesday’s session in record territory – a feat not recorded since late July, but they took a respite from the post-hurricane rally, which set the tone overall for the day. Into the close, the S&P, Dow and Nasdaq all managed to recover and the small gains were enough to see them close at record levels. The economic news took in the UK unemployment rate’s fall to a 40-year low of 4.3%, but the pressure on wages remains as growth came in at 2.1% (in the three months to end July) versus a current inflation rate of 2.9%, representing a fall in real wage growth (when adjusted for inflation).

Gilt yields didn’t rally on the news and were stuck at previous levels before a late sell-off saw them close at 1.15% (+1.5bp, 10-year). In the US, producer prices nudged up 0.2% in July versus expectations of 0.3% and was 0.1% versus expectation of 0.2% when stripping out volatile items. The Fed meet is next week.

Secondary market spreads moved in tight ranges in a lacklustre midweek session. There were a couple of non-financial IG deals to have a look at, a tap and some pricing indications for upcoming high yield fund-raising. Also, it gave us time to think about how the corporate bond market’s performance has fared over the past month. For sure, we find that IG corporate bond market in sterling and euros – in IG – has been a relative beacon of stability.

Actually, the high yield market is completely unchanged in the same period! The index is currently at B+293bp and has spent the month trading in a 7bp range for the cash index, but has been heading tighter of late and is off the recent wides.

Show me the money

Virgin media featured with a £450m tap

There were deals and the most impressive were the taps from Virgin Media in sterling and CEZ in euros. Both taps were well in excess of the original sizes – and by some considerable margin, and it was not lost on us that these deals offered some decent yields. The bid for higher yielding assets remains firmly intact in all markets, even if the majority of the inflows flowing into corporate bond funds is earmarked for IG corporates.

The deal flow in non-financials came from Anglo American, Suez and CEZ (tap). The former came with an 8-year deal at midswaps+110bp and that final pricing was some 30bp inside the initial talk as borrower took €600m.

Suez opted for longer funding, the 15-year maturity deal for €500m pricing at midswaps+50bp, -15bp inside the opening pricing salvo. Finally, Czech electricity group CEZ added a much increased €225m as it tapped its 3% €500m deal of June 2028 at midswaps+85bp (-10bp versus IPT). So, a lighter session again with €1.325bn issued and the weekly total put at €5.9bn after three session. And that’s €14.6bn for the month as we approach the halfway mark for it.

Elsewhere, we had Virgin Media in sterling also tap – for a much increased £450m – of the outstanding 5.5% 2024s. For European high yield, we had Viridian price €350m in an 8NC3 structure to yield 4% as well as a £225m 7NC3 structure to yield 4.75%. This was followed by Greece’s Intralot’s €500m deal by way of a 7NC3 note to yield 5.25%.

After the SoftBank dual currency transaction on Tuesday, the deal total for the month to date for high yield is now at almost €6bn and we think a target close to €10bn of issuance for the full month – given the size of the pipeline – is in play. The senior financials market drew a blank, the rest of the day’s borrowing coming from the odd SSA offering.

Session fizzles out into mediocrity

At the close, the DAX was up just 0.2%, the CAC the same while the FTSE was off by the same amount. US stocks dipped in and out of red and black but closed at those fresh record highs. Government bond markets were better offered for choice with yields a little up in the session, the 10-year US Treasury left at 2.19bp (+2bp) and the Bund at 0.41% as the hurricane/geopolitical rally continued its reversal.

As for the credit markets, the indices are the usual first port of call for gauging sentiment. They edged better – lower, that is – by around 0.5bp for both. Main closed at 51.3bp and X-Over at 226.2bp.

In secondary cash, the market closed unchanged in investment grade (index at B+109.6bp). The high yield market was a touch better bid and the iBoxx index closed at B+292.5bp (-1.5bp) and at the lowest level for month.

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.