29th August 2018

Euphoric US markets

iTraxx Main

65.7bp, +0.7bp

iTraxx X-Over

287.9bp, +3.4bp

🇩🇪 10 Yr Bund

0.40%, +2bp

iBoxx Corp IG

B+133bp, +0.3bp

iBoxx Corp HY

B+386.5bp, -1bp

🇺🇸 10 Yr US T-Bond

2.88%, unchanged

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”18″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”20″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”22″]

Respite Wednesday…

Deals are back!

There were deals, but we didn’t quite manage to generate the same level of excitement as in the previous session. Just as well, as it might have been too much for some! The takeaway from Tuesday’s corporate bond deluge – €11bn of IG financial and non-financial issuance – was that the market can take such a high level of daily issuance and that borrowers are lined up to pull the trigger as and when required.

So, while we had some primary activity, it was a generally quieter session across the board. There was some excitement around the possibility of Canada agreeing to a freshened-up NAFTA deal but the markets didn’t follow through by going materially higher, in what turned out to be a limited session which saw most treading water as we come close to the end of the month.

We’re not buying into the need for borrowers to get deals away while the ECB is still meddling in the market (overall purchases decline by 50% from €30bn to €15bn from October to year-end and then drop to zero save for reinvestment of maturing obligations). It’s a marketing tool, and that’s all. The spread markets will find a new level once the purchases decline/end, and we might get a feel for the level of spread market manipulation achieved by the €166bn+ of IG corporate bond purchases since June 2016 by the central bank.

There must have been some impact given that they own 21% of the eligible market, and while we have (at times) ratcheted tighter we have failed to hold the record low levels achieved at the end of 2017 with most markets seeing a back up in spreads of around 30% from those lows. Funding costs will likely rise a little, especially if the underlying curve starts to move higher, but we are not looking for a major move in any direction for spreads.

That’s because spread direction will be dictated by fundamentals (state of the economy), where rates are, the buoyancy of the equity markets or otherwise and asset allocation. And we can worry about that in December as we strategise for 2019. Until then, there is plenty of sidelined cash looking for deals to get invested in. And if this week’s ‘pre-September’ flurry is anything to go by, few are going to complain that they are not seeing enough primary market activity.

On Wednesday we had a three-tranche Michelin euro deal to contend with, Compass group opted for dual currency sterling and euro deals while MBank and Sabadell were the senior financial representatives.

Deal flow lightens, but just a little

Michelin: €2.5bn three-tranche offering

Michelin was the headline act in the session with a three-tranche offering for a total of €2.5bn. They took €750m in a 7-year at midswaps+43bp, followed by €1bn in a 12-year at midswasp+73bp and a 20-year tranche for €750m costing them midswaps+110bp.

Combined books for the deals were at around €7bn and final pricing was 15-17bp versus the initial guidance. Compass was the other IG non-financial borrower, taking €500m in a 10-year at midswaps+65bp from a book at around €2bn and final pricing 15bp inside the opening guidance.

It’s not often that we get an €18bn August – in terms of deals in IG non-financial corporate bond deals. Actually, it hasn’t happened before, thus representing fabulous month so far and coming after a relative dearth of deals in the previous 7 months of the year. For the year so far, we are now up at €143bn in issuance versus €185bn for the same period last year. It’s difficult to ascertain where we might close out the year, but our revised lower forecast of €220bn looks under threat!

In financials, the deals were all in the senior space. Banco de Sabadell took €750m in a 5.5-year non-preferred offering at midswasp+130bp. Poland’s MBank issued €500m in a 4-year at midswaps+90bp and CIBC tapped its 23s for €350m at midswasp+35bp. The total for the month of senior deals is now €12.6bn – also a very good level of issuance.

US GDP surprises to the upside

The big data point in the day was that 4.2% US GDP print for Q2, ahead of the 4.0% expected. The print helped propel the S&P through 2,900 and to a new record high (+0.6% as at the time of writing). Similarly, the Nasdaq was also breaking fresh records (+0.9% at the time of writing). In rates, US 10-year yields were unchanged at 2.88% and the 2s/10s a touch steeper to 21bp. Bund yields moved to 0.40% (+2bp) in the 10-year.

Just as that was being seen in the US, we had EU negotiator talking about offering the UK a deal on Brexit. Gilt yields rose 3bp to 1.49% (only partly on the back of this news), sterling rallied by almost 1% versus the euro and the dollar (on the back of the news) – and stocks fell as a result of the stronger currency. It’s all last minute stuff, and had the markets cock-a-hoop!

Synthetic credit reversed the previous session’s gains, with iTraxx Main up 0.7bp to 65.7bp and X-Over higher by 3.4bp at 287.9bp. As for cash, those deals were the primary focus and secondary once again took a back seat. Also, once again, cash spreads edged wider but the moves are nothing significant. The iBoxx cash index was up at B+133bp (+0.3bp, again) but the continued (moderate) weakness in the underlying took total returns for the month into negative territory (-0.1%).

As for high yield, it was all quiet on the primary front, and the only deals this month came in the opening session of it as Nexans and Wizinik between them issued €840m. And there is little happening in secondary, the index closing the session a basis point tighter at B+386.5bp. High yield total returns are up at +0.1% for the month.

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.