8th November 2018

Deep breath

iTraxx Main

68.0bp, +0.8bp

iTraxx X-Over

282.4bp, +2.1bp

🇩🇪 10 Yr Bund

0.46%, +1bp

iBoxx Corp IG

B+140.5bp, -0.8bp

iBoxx Corp HY

B+416.7bp, -2.3bp

🇺🇸 10 Yr US T-Bond

3.23%, +1.5bp

🇬🇧 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″]

The recovery lasted all but a day. Nevertheless, primary has reopened, the deal flow looks a lot better and could potentially be sustainable – even if equities only tread water for a while. US pharmaceutical group Allergan along with BMW and Intercontinental Hotels piped up for the IG non-financial market in the week’s penultimate session, adding another €4bn to the issuance level.

Away from that, the jousting continues between the European Commission and Italy while Eurozone macro is feeling the chill as evidenced by the weak trade data for Germany in September (exports and imports down by 0.8% and 0.4%, respectively).

We’ve likely got just 4 weeks worth of business left in the market before it winds down for the yuletide break. And we have to take in the US Thanksgiving holiday as well. However, we are of the view that much can be fitted into this period. We are still holding out for primary to hopefully deliver upwards of €20bn of IG non-financial deals, which will take us into the €205bn – €210bn area for the full year (versus €260bn last year).

On the spread front, we suggested in Wednesday’s comment that we’re looking for a steady grind from here into year-end. Obviously, event risk permitting, over the next week or so we have the Brussels/Italy skirmish to handle as well as being into the final furlong of the Brexit deal/no deal talks. They’re both rather large imponderables.

The latter would probably curtail primary activity if ‘no deal’ emerges as the most likely outcome, but we believe the markets would soon recover their poise and move on. The former is another issue altogether as it becomes a Eurozone issue and the volatility could be more substantial and therefore have a more lasting and penetrative effect on risk markets.

Credit spreads have seen some decent recovery this month but in line with the broad recovery of the markets elsewhere. The gridlock in US politics has helped for reasons highlighted in Wednesday’s comment, while the weakness and higher volatility that we saw in October looks like it won’t be repeated (hopefully). So the cash iBoxx IG index is almost 5bp tighter in the past week at B+140.5bp, and total returns for the year so far are at -0.8%.

We are targeting spreads to tighten further and somewhere around B+135bp would reflect the mentioned event risk and a grind tighter. Returns are not going to rise into the black for the full-year – but -0.5% to -0.8% would be a good effort from the IG market.

The high yield market is a shorter duration one and the anchoring of front-end yields has helped total returns. From this measurement, it is outperforming IG. The iBoxx HY index is 16bp tighter this month, but 133bp wider this year at B+419bp. If equities stabilise then this market can also grind better and we would be looking at a sub-390bp level for the index by year-end. From a total returns perspective, the picture is much brighter with losses of just 0.75% year to date in high yield. Issuance was on course for another record year, but October’s equity volatility has put paid to that possibility – we think. There are plenty of deals in the pipeline, but it looks as if we will close the year with it being the second best for issuance (last year €75bn record for the full year, 2018 YTD €61bn).

Busy primary

Primary expects a deal from Verisure

We wouldn’t put it past the realms of possibility of a deal or two on Friday. Market conditions permitting, we will at least get the €720m dual-tranche high yield transaction from International Design Group SpA priced, as well as Verisure which is expected to price loans and bonds. An opportunistic effort from an IG frequent borrower would work, too.

As for Thursday, we had an opportunistic offering from BMW which issued €750m in a long 3-year at midswaps+30bp and a 6-year tranche for €1bn at midswaps+60bp, on combined books of €4bn and final pricing 15bp tighter versus the opening guidance levels. Following that was Allergan which took €700m in a 2-year floater format at Euribor+35bp (-15bp versus initial guidance), €500m in a 5-year maturity at midswaps+120bp (-25bp versus IPT) and another €500m in a 10-year effort priced at midswaps+165bp – also 25bp inside the initial talk. Combined books exceeded €7bn.

Bringing up the rear was Intercontinental Hotels with €500m of its own, in an 8-year maturity at midswaps+135bp, which was just 10bp tighter than the initial guidance with books at over €900m. The day’s IG non-financial deal flow was up at a very good €3.95bn and for the month so far, we are up at €7.2bn.

Elsewhere, ING issued €1.5bn in a green bond at midswaps+135bp for a 12-year maturity – the first euro-denominated senior deal in three weeks. In sterling, we had NIBC Bank for £250m in a 5-year at G+205bp and Karbon Homes also for £250m in a 29-year senior secured deal at G+153bp.

FOMC day curtails activity

The markets otherwise spent the session awaiting the Federal Reserve’s rate decision. European equities, though, were on the back foot, with the Dax giving back 0.5% with US bourses mixed ahead of the call. Some sterling weakness helped the FTSE alone in the black but by just 0.4%.

In rates, Italian 10-year BTPs were yielding 3.42% (+8bp), Bund yields edged up to 0.46% (+1bp, 10-year) and Gilts were yielding 1.57% (+3.5bp) in the same maturity. The 10-year US Treasury yield was at 3.23% (+1.5bp).

And then the Fed decision came with no change on rates (as expected) but we are on course for that December hike. Job gains of 200k a month, an unemployment rate at 40-year+ lows, wage growth on the up and inflation on target with domestic economic growth at good levels means we are looking forward to three hikes in 2019. US stocks didn’t move much on the news (at the time of writing) although Treasuries were better offered (10-year at 3.24%, +2.5bp) and the 2-year yielding 2.97% (+2bp).

Before that, iTraxx Main closed at 68bp (+0.8bp) and X-Over was up at 282.4bp (+2.1bp) in a moderately risk-off session. Cash, though, managed to edge tighter and the iBoxx index was 0.8bp lower at B+140.5bp although it wasn’t a busy session at all. And just to show that credit is in decent shape, the HY market also edged a little tighter meaning the index was left at B+716.7bp (-2.3bp).

Have a good day.

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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.