8th April 2019

Credit outperforms

iTraxx Main

61.9bp, +1.3bp

iTraxx X-Over

260.1bp, +6.3bp

🇩🇪 10 Yr Bund

0.00%, unchanged

iBoxx Corp IG

B+134.5bp, -0.1bp

iBoxx Corp HY

B+414.5bp, -1bp

🇺🇸 10 Yr US T-Bond

2.51%, +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″]

Biding one’s time…

It was very much a touchy-feely session to open the week. The equity markets were a little hesitant, rates were doing nothing and secondary credit was treading water (and outperforming) although we had a few deals in primary to contend with.

Brexit headlines over the weekend suggest that the various protagonists are trying to find common ground – or otherwise and all-in-all we managed to find a way through the day. The news flow took in weak German export performance in February as it continued to wrestle with global uncertainties while another survey suggested sentiment across the region remained fragile. We have the ECB meeting coming up later this week,  and those issues (amongst others) will have been noted although any further easing moves by the central bank are unlikely.

There’s little evidence that the steam might be running out of the corporate bond market. After an excellent first quarter, the second quarter continued with some gusto and despite the sell-off in rates, we’ve managed to hold on to previous performance in both absolute (total returns) and benchmark (spread) terms. In fact, higher beta sector have squeezed to continue to outperform.

So as it stands, there is very little not to like about the credit markets. Central banks remain poised. The ECB won’t do anything this week, the Fed won’t do anything on rates (this year, likely) and we already know they are paring their balance sheet reduction effort before they stop in September.

That leaves equities gyrating to the prevailing news flow (earnings season takes centre stage come Friday for a few weeks), and we think that market rates will still go lower despite the push higher over the last weeks on hopes of some kind of trade tariff agreement between the US and China as well some moderately better data. That won’t last as macro likely disappoints through the next quarter and beyond.

The path of least resistance is still for lower rates. And for credit, it’s for tighter spreads although the current tightening pace is unsustainable. IG (iBoxx) tightened 5bp last week for instance and returns are approaching 3.5% year to date on spreads 38bp tighter. That’s excellent,  just as supply levels across IG non-financials and senior bank markets has been a real eye-opener – smashing expectations.

Those portfolio cash inflows have needed to be filled. Borrowers have taken the opportunity to fill their boots on cheapening funding again. The performance of over 90% of this year’s new deals is tighter and the confidence in the market is sky high. Some of that has been sullied by the latest news flow around the auto sector and the collusion between the big German players on technologies, but otherwise, the corporate landscape hasn’t offered too much pain for investors.

Ineos shines in HY primary

The high yield market was the lead one for the session and Ineos’ deal took the attention. The chemicals giant came with €770m in a 7NC3 offering priced at 2.875% (-37.5bp versus IPT).

After an uncharacteristic lull (not deals last Thursday/Friday), in the IG space, South Korean chemical group LG Chem issued €500m generating a €4bn book for a 4-year green bond priced at midswaps+65bp which was 25bp inside the initial mumble.

Diageo was in for 4.5-year maturity funding for €600m and midswaps+23bp (-22bp) while they also took £500m in sterling funding at G+90bp (-15bp) for a 7.5-year maturity. The book sizes were €1.6bn and £1.4bn, respectively, at guidance.

Bringing up the rear, ABN Amro Bank printed €750m in a 7-year senior preferred green bond format at midswaps+38bp.

Waiting for something to happen…

With the earnings season looming, US equities displayed some nerves and managed to trade in the red for most of the session, as at the time of writing, and by up to 0.5%. Thus they gave little impetus to European markets to recover through the day, themselves generally in negative territory throughout. By the close, the Dax underperformed as it lost 0.4% with other bourses flat to exhibiting the smallest of declines, the FTSE almost alone up (+0.1%) in a lacklustre session.

Rates did very little either, leaving the 10-year Bund yield at 0.00%, the Treasury at 2.51% (+1bp) and the Gilt to yield 1.11% (+1bp).

The credit indices reversed their gains of late, the iTraxx Main S31 contract at 61.9bp (+1.3bp) with X-Over at 260.1bp (+6.3bp).

In the cash market, secondary was quiet as we might have expected with nothing untoward imputing the German auto issuers, either. Credit generally outperformed both equities and rates.

The iBoxx IG cash index closed at B+134.5bp (-0.1bp). The AT1 market also edged tighter, for choice, the index left at B+561bp (-2bp) with returns for both indices improving a touch.

And finally, the high yield market was also a touch better amid little activity. The HY iBoxx index closed at B+414.5bp (-1bp).

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.