29th April 2016

Few April showers

FTSE 100
6,322, +2
10,321, +21
S&P 500
2,076, -19
iTraxx Main
71bp, unch
iTraxx X-Over Index
302bp, unch
10 Yr Bund
0.26%, -3bp
iBoxx Corp IG
B+140bp, +0.5bp 
iBoxx Corp HY Index
B+482bp, +2bp
10 Yr US T-Bond
1.83%, -2bp

Sell in May? Not on your nelly…

We end the week on mixed emotions and sentiment. The Fed stayed put but offered a hawkish stance: June could see another 25bp rise in US rates. The BoJ wrong-footed the market, stocks fell everywhere and only the yen didn’t care. Deflation has taken a grip in the eurozone but economic confidence rose. Equities have been volatile but lower, government bonds had sold off but then looked to recover some of the losses and oil is heading for $50 per barrel (Brent), signalling a quite remarkable turnaround. The earnings season has been fairly decent, with expectations met in most cases and no major humdingers apart from Apple’s iPhone sales update.

We had another zero-coupon corporate bond issue, while we thought some sense had finally come to the new issue market pricing dynamic. We were wrong-footed on that one in double-quick time. Initial price guidance remains suspiciously high (some would say attractive) and the final price is being rammed tighter, with only a few daring to pull out. New deals continue to perform on the break and there is little or no repricing of secondaries. Corporate bond spreads have been grinding steadily tighter without any fuss and new deals are being taken down with aplomb. Returns as we close out the month are fantastic (just shy of 3% YTD in IG and HY), and 4%+ total returns in IG for this year would represent a superlative effort.

New issue market delivers a record April


€750m 10-year maturity: Alimentation Couche-Tard

We close out with €30bn of non-financial IG corporate debt issued in April. That total was achieved after deals yesterday from Alimentation Couche-Tard, which sold €750m in a 10-year maturity at midswaps+125bp (-25bp versus IPT), while Kering lifted €500m in the same maturity at midswaps+67bp, or -18bp versus the initial guidance. The €30bn figure is a record for any April month and ought to enable the market to push on through May. The demand is there, but we can’t help feeling that borrowers are shy in coming forward. We can expect the first quarter European companies earnings season to be a big enough excuse to perhaps curtail some issuance. In addition, there might be some contagion from US rates speculation, with any volatility leaving periods of inactivity. That will depend on the incoming data, and there will be much to-ing and fro-ing on it. Yesterday’s slower than expected reported Q1 growth rate in US GDP (+0.5%) being a case in point. In fact, the US recorded the third consecutive decline in quarterly GDP, consumer spending and business investment.

The HY market also stayed perky with €3.3bn of issuance, while senior bank deals total €19bn. For senior banks we wouldn’t have expected much more, but the HY market hasn’t hit the €10bn mark yet for the year to date. This market has nevertheless had a fairly decent couple of months on the back of returning positive sentiment towards the asset class in the US, and there is a small boost from the ECB crowding out effect to come for IG debt investors. Should confidence remain as it is then we could expect a pick-up in supply through May.

Subordinated financial issuance has seen continued good supply and yesterday we had a trio of deals. Banco de Sabadell and Belfius Bank both issued €500m in 10-year T2 notes, while Bankinter clipped €200m in PNC5 AT1 format.

Off the lows as we close out

As we effectively closed out April, European equities were well off the intraday lows, likely on some late month-end rebalancing, because there was little else in terms of a catalyst to promote such a move. We were left with most bourses close to flat in the session. Ten year Bund yields declined to 0.26% giving up some gains after having been as low as 0.21% early in the session. Oil continued its now more steady climb, up at $48 per barrel (Brent). In the corporate bond market, the penultimate session of the month was largely a book-keeping one although those deals mentioned earlier still needed to be consumed.

Spreads closed pretty much unchanged in a fairly unremarkable European session with the Markit iBoxx IG corporate index at B+140bp and the HY index left at B+482bp. Even the synthetics closed unchanged with iTraxx Main at 71bp and X-Over at 302bp. However, with losses in US stocks accelerating into the close, we’re in for a weaker final session of the month. That means lower equities, wider iTraxx and more than likely, the slightest of weakness in cash while any bund strength will keep credit returns propped up and help make for a very good month overall.

Have a good weekend, back in May.

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.