12th September 2017

Deals queueing up

iTraxx Main

51.8bp, -0.2bp

iTraxx X-Over

226.7bp, -1.7bp

10 Yr Bund

0.40%, +7bp

iBoxx Corp IG

B+109.6bp, -1.5bp

iBoxx Corp HY

B+294bp, -6bp

10 Yr US T-Bond

2.17%, +5bp

FTSE 100

7,399, -15


12,525, +50

S&P 500

2496.5, +8

We need more…

Shock! Horror! Where did all the corporate bond issuers go? Tuesday’s session was dominated by SSA borrowers and the headlines went to Austria’s century bond – the first such benchmark public issue from a Eurozone country (for €3.5bn). The €11bn+ of orders will have others licking their lips. They threw in a 5-year maturity, €4bn size issue too. Equities were on the up again in a positive session for risk assets while we saw some further moderate weakness in safe-havens (government bonds), where Gilts were the main under-performer following publication of the higher than expected CPI numbers (2.9% year on year).

Credit spreads edged better in the session where – quite disappointingly – only two IG non-financial corporate borrowers (three tranches) managed to print deals in the day.

Other than that, US stocks were posting fresh record highs and the credit markets were in rally mode as evidenced more obviously though the iTraxx indices as Main and X-Over pushed through to new recent lows. Secondary cash was better, flows again very limited and the now perennially reduced levels of liquidity might see us push materially tighter in particularly bullish sessions.

Sugar rush: Bottler Coca-Cola Içecek

In primary, we had deals from Ahold Delhaize for €750m at midswaps+50bp which was 15bp inside the initial guidance), and a dual tranche effort from the London Stock Exchange (LSE) for a combined €1bn split equally in 7-year and 12-year maturities which were priced some 15-20bp inside the initial guidance levels.

That’s just €1.75bn for Tuesday’s business, on top of the €2.85bn printed in non-financials in Monday’s session. So, €4.6bn in the opening two sessions of the week still leaves us expecting €10bn+ this week. We have had 20 individual IG non-financial issues so far this month, and €13.3bn issued.

The other notable deals came from Coca-Cola Içecek in dollars along with the Bank of Ireland in sterling (£300m) and dollars ($500m)- and both in a Tier 2 10NC5 structure. In senior financials, Commerzbank was out with a €500m 8-year senior deal taking the senior financial total for the month to date to €3bn.

The high yield market drew a blank (although we were still waiting for SoftBank to be priced – for 8-year and 12-year debt totalling €2.25bn) but many deals are currently on the road and/or being scrutinised with pricing on a few possibles on Wednesday.

Safe-haven bid in sharp reverse

The sense of crisis has lifted from the financial markets, for now. And there is probably a bit of relief to go with it, helped in no small part on comments from US Treasury secretary Mnuchin that Fed Governor Yellen was being reconsidered for the role past the post’s 2018 expiry date. Bund yields backed up to 0.40% in the 10-year (+7bp) in a fairly aggressive trade unwind which also saw the US Treasury in the same maturity back up to yield 2.17% (+5bp).

The 10-year Gilt yield rose sharply too, in a quite ferocious move to 1.14% (+10bp), not because there was a pull back in the bid for safe assets, but more because of the higher level of CPI reported. We still don’t think that the BoE will be raising rates anytime soon, and will choose to tolerate these higher levels of inflation for a good while longer. These larger-than-average daily moves though were not, however, the story of the day.

That has to go to the US equity market. Having already ended Tuesday’s session at a record high for the S&P, they added some more in Wednesday’s session. With the Hurricane Irma fast dissipating and seemingly little going on at the moment around North Korea, it would appear that investors have found much reason to pile on some more risk. The improved appetite is lifting all boats – except UK stocks hampered by the strengthening in sterling (now $1.3250) – with the DAX making more ground and through 12,500 (+0.5%), for example. Most European bourses added over 0.5% in the session.

Credit very well poised

The iTraxx indices are the liquid risk proxies for the corporate bond markets and they moved lower again, highlighting the growing confidence in the asset class. They have been outperforming the cash markets, which are moving tighter much more slowly on the back of reduced activity amid poor liquidity and investor focus on the primary markets.

The slower movement tighter is as evidenced by the cash indices, but in reality, the level of liquidity is so poor in the cash market that visibility is poor too. There are very few sellers, while demand is elevated (for primary) and the ECB is vacuuming up probably the richer corporate bond risk. Inflows into IG funds continue. Unfortunately, the reverse in the underlying – government bond yields sharply higher – are going to eat into this month’s returns, if sustained.

Anyway, the indices recorded a fairly modest tightening in the session, with Main just 0.2bp tighter at 51.8bp and X-Over lower at 226.7bp (-1.4bp). They’re at their early summer lows, nevertheless.

In the cash market, the Markit iBoxx index was showing B+109.6bp, lower in the session by 1.5bp with some outperformance in the higher beta sectors as AT1/CoCo marks improved (but likely with little flow into it). Finally, in the high yield market, we had the index at B+294bp which saw it 6bp lower in the session and highlights the nature of this extremely illiquid market. That is, disproportionate spread moves into the lowest levels of any activity. The bias was risk-on in the session across the board, and when it is that good, this market sees prices moves higher relatively aggressively.

There is more to go this week, it appears.

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.