- by Suki Mann
|iTraxx X-Over Index
|10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY Index
|10 Yr US T-Bond
Coming soon, corporate bond negative yields at new issue…
We are well aware that there are plenty of corporate bonds in secondary trading with negative yields due in no small part to ECB’s QE actions. But will investors swallow a negative yield at new issue? As long as they believe yields generally can go lower then the capital gain will suffice as an offset; but also, parking cash costs between 40-100bp depending on their depository bank. We are close to – and just need – that first borrower to manage the feat and set the tone for others to follow. For it to possibly become more commonplace though, we require a greater tightening in credit spreads – which we believe will come through this second half of 2016, but also for no material reversal in yields of government bonds.
The low interest rate regime environment engulfing government bonds (10-year Bund currently yields -0.09%, we target -0.35%) has seen to it that swap yields have also declined. That is – give or take modest intra-day moves – the 3-year swap is at around -0.25%, the 4-year at -0.22% and the 5-year at -0.17%. New issues priced against the swap yield means that we need a borrower to print at a level versus midswaps tighter than the aforementioned levels for the respective maturities, in order to print a deal with a negative yield. Credit spreads for solid double-A, non-sovereign owned borrowers already have us very close to this situation. It’s not the perfect (or “pure”) example, but 100% state-owned/not guaranteed Deutsche Bahn (Aa1/AA) printed a deal yesterday at midswaps+15bp for just €350m. The swap yield moved to -0.155% at the time of pricing, so the deal just shaved it, printing with a negative yield. For many others, it could just be a matter of time.
Overall though, spreads – on an index basis – are still 45bp wider than their historic tight. The ECB’s buying cares, the ongoing demand by fixed income investors in search of yield and the subsequent squeeze on liquidity should see us tighten and flatten as high/low beta risk compresses. That will eventually bring single-A rated borrowers into the fold and for longer maturities, not just say for the 3-year maturity.
So, will investors swallow a negative yield at new issue? Yes, they will.
Primary credit market just flickers
It might have flickered, but the primary markets are hardly firing on all cylinders. Maybe we have got it wrong and the market is effectively done – or close to being done – for the summer months. The excitement nevertheless seemed to be around the record low yield achieved on the £500m, 2060-maturity Gilt, where the new debt was auctioned off at just 1.44%. The government debt markets – in secondary – were not on fire though, with the 10-year Bund yield higher by some 8bp to -0.09% and the equivalent Gilt yield was at 0.83% (+7bp). We’d probably think that some of the defensive positioning of late – post Brexit – was being unwound as some certainty came back into UK politics. For good measure, the 10-year Treasury rose 9bp to 1.52%.
In credit, as well as that small deal from Deutsche Bahn (although we don’t count it as being a pure corporate transaction owing to its ownership), we had a couple of other IG non-financials in the form of PerkinElmer with a €500m, 10-year at midswaps+165bp (a massive 30bp inside IPT) and Belgian electricity/gas grid operator RESA with a €500m/3-tranche deal (in 10, 15 and 20-year funding). In financials, BNP did a €500m tap of its November 2022 deal.
Sun shining: Stocks gain, secondary credit rockets
It’s always the case, we are either one way or t’other. There’s very little room for the middle ground. Equities had another good day with the S&P500 and the Dow30 both achieving a new record highs, the DAX firmed a healthy 1.3% higher while the FTSE experienced a more volatile session, closing out flat in the end. The DAX is now around 7% down again YTD, having been as low at 18.5% lower in mid-Feb and 13% lower for the year to date last week!
Fudges, circumventing bail-out rules, or even potential for leniency around state aid and so on saw to it that the Italian banking sector, under much pressure of late, had a good recovery in asset prices. Unicredit’s announcement of asset disposals also helped sentiment and we saw the corresponding lift in equity and debt prices. Bell-weather insurer Generali, with much skin in the game, saw its subordinated debt rise by over a point. Elsewhere, the credit market was in fine shape. Little by way of flows and volumes, but we did record another positive session.
For the rest of the credit market, a stunner! Using the index as a broad measure, the Markit iBoxx corporate IG index dropped to B+140bp. That was 5bp lower in the session! And the recovery was across the board with CoCos and hybrids leading the charge. The index yield was stable at 1.03% and parked just a basis point above the historic low, with the spread tightening offsetting the sell-off in government bonds. We have aired our view in several comments previously that spreads are going to crunch better over the summer months, and into liquidity parched secondary markets with the ECB on a major lift-fest, we maybe just saw the first signs of that in yesterday’s session.
High yield risk had a better session of it too. Equities helped, but a 13bp move on an index basis suggests that the mood was upbeat and few were willing to lose paper. The Markit iBoxx index was better at B+483bp and the lowest level in several weeks. Finally, the follow-through was felt in the cost of protection (lower) with Main down at at 71bp (-4bp) and X-Over at 321bp (-12bp).
Have a good day.