2nd December 2018

Credit finally feels the chill

iTraxx Main

80.7bp, +1bp

iTraxx X-Over


🇩🇪 10 Yr Bund

0.32%, unchanged

iBoxx Corp IG

B+166.9bp, +1.9bp

iBoxx Corp HY

B+497.5bp, +3bp

🇺🇸 10 Yr US T-Bond

2.99%, -2bp

🇬🇧 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″]

Xmas needs to come early…

Global tensions at the G20 dominated the final session of last week, leaving the markets to display some defensiveness as we closed out a weak and, at times, volatile month. October was a difficult period and November also proved to be tough but displayed less of the wild swings seen before. Credit spreads just leaked wider on a consistent basis and gave their worst monthly performance for 2018. European equities were lower by up to 2%, adding to the big losses seen already in the period to end of October. Duration was slightly better bid across the board. We’re going to be licking our wounds in December, no doubt none-the-wiser as to how 2019 will play out.

There is so much still to think about for December. The Italian budget spat with the EC continues, and that Brexit vote is closing fast (December 11). We should be concerned on the developments in Ukraine. The Fed’s Powell is up testifying on the economic outlook before a congressional committee later this week, but all eyes will be on the Fed on December 19 (25bp hike still expected).

Credit nursed some big losses in November. Having held up so well against a fairly hostile macro/geopolitical backdrop which saw huge volatility in equity markets, credit markets have had a very poor month. It’s not as if other markets have a particular lure, but we just seem to have been impacted by investors probably overly concerned about protecting performance, much repricing of secondaries that comes with cheap primary, punishing single-name stories, some outflows and massive illiquidity leading to a disproportionate spread weakness. It’s difficult to trade.

IG had lost 0.8% in the ten months to the end of October but, in the 11-month period this year, it has now lost 1.5% (total returns, iBoxx index) coming from a very weak November. Spreads widened by 23bp in the month in the IG iBoxx index. Non-financial sector losses in the period rose to 1.3%, while financials lost 1.7% – all recording significant declines in November.

The high yield market took a big hit, too. The Jan – Oct period resulted in total returns of -1.3%, but when we include November, those losses increased, to -3.2% mostly all due to spread weakness. The CoCo index is nursing losses of 5% this year.

Sterling IG, a longer duration sector, is sitting on losses of 3.3% in the year to end November. The winner in fixed income markets? Eurozone sovereigns, returning -0.05% in the 11 months so far.

We don’t have it so bad in credit, though. We saw further deterioration in equities through November. The Dax is now showing total returns of -12.8% in the year to end November (-11.4% to end October). The FTSE is off by 9.2% in the same period (-7.3% to end October). EuroStoxx is down 9.5% in the year to end November.

US stocks have fared better, though, saved by that late big rally in the final sessions of the month. The S&P is up 3% and the Dow is +3.3% – both in the period to end November. With Brent at $59 per barrel, it is $7 lower since the start of the year, and $26 lower than its 2018 peak.

Primary recovers, but not enough

It is quite clear that the primary market has been a victim of the massive volatility seen in the markets this year, but we have also managed to over-estimate how much borrowing is needed to get done too. Overall, there has been big disappointment in the numbers. As the historic European central bank QE draws to a close, we have detected no clamour from borrowers to get deals away, as likely it will be that borrowing costs (continue to) rise.

November, nevertheless, for IG non-financials has been a good month. Almost €27bn was issued from 19 corporates and 36 tranches. A feature was that multi-tranche where we had three from each of Logicor (€1.8bn) and Allergan (€1.7bn), with four from VW (€4.25bn) and Stryker Corp (€2.25bn) and that massive six tranche offering from Takeda for €7.5bn. The size of those offerings meant that new issue premium rose (needed for size) versus secondaries, where the latter was repriced hard – and the effect felt through the market.

With 11 months now gone, the total IG non-financial issuance stands at a lowly €216bn. That compares unfavourably with the average of around €255bn for the same 11 months in the period 2014-2017. Judging by the level of event risk still lurking and the clear and present danger that comes from it – whilst reflecting on the less than €10bn issued each December since 2014, we’re not looking for anything more than that €10bn for December’s issuance.

In fact, we only really have a couple of weeks in which to transact this month and with that Brexit vote closing in, nervous markets are not going to be kind to borrowers. So we might be looking at just say €4-5bn and €220bn or so for the full year.

The high yield market has flattered to deceive, too, in November. We were on a great run through to the end of September, but this final quarter of the year has really disappointed. It’s obvious why, though. Equities. That volatility has run right through to the high yield market and stopped it dead in its tracks. We were on course for a record year – again, but now, we will just have to settle for 2018 being the second best on record.

November threw up just €1.82bn of deals from 4 borrowers, with the 2-month supply (Oct/Nov) coming in at just €6.1bn. For the 11 months, it’s €62bn and we are probably looking at around €63.5bn – €65bn for the full year. That compares fairly well with the record €75bn in 2017.

A late flurry of deals from the likes of HSBC, Commerzbank and ABN AMRO took the senior bank supply total to a very good €14.6bn for the month, exceeding last year’s €12.6bn. For the 11-month period, we’re just shy of €130bn and need another €6bn to get away in December in order for 2018 not to be the lowest for senior supply since the euro currency was introduced (that was €135.75bn in 2017).

US markets still out in front

We closed out the final session of the month with European equities up to 0.8% lower (FTSE underperformed), while US markets benefitted from a late rally to leave markets there 0.8% higher. Powell’s comments earlier in the week still held some hope that the duration unwind had gone too far, and we saw the 10-year US Treasury close below 3%, at 2.99% (-2bp). The 10-year Bund yield was unchanged at 0.32% but had been lower for much of the session.

IG credit is having no support. We again moved almost 2bp wider in the index, the IG iBoxx cash index now up at B+166.9bp and the widest level for the year so far. It was a similar story in high yield, but there was relative outperformance versus IG, the index 3bp higher at B+497bp.

As for this week, the Brexit debate will rumble on ahead of that crucial vote next week. Powell is up before Congress and the markets will be watching, very closely. And we close the week with November’s US non-farm payroll report. As for primary activity, that’s anyone’s guess!

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.