29th September 2019

Finishing line is in sight

iTraxx Main

56.2bp, unchanged

iTraxx X-Over

233bp, unchanged

🇩🇪 10 Yr Bund

-0.57%, +1bp

iBoxx Corp IG

B+124bp, -0.5bp

iBoxx Corp HY

B+414bp, unchanged

🇺🇸 10 Yr US T-Bond

1.69%, +1bp

🇬🇧 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″]

Can’t keep him out of the headlines…

The quarter draws to a close with many of the risks besetting us all year and potentially serving to derail the markets still with us. Trump obviously tops the list of risks, but Brexit has moved up to second spot as no-deal becomes a clear and present danger. Weakening macro always lurks as a big concern just as the US/Chinese trade dispute potentially breaks new ground, and we have the Middle East geopolitical risks entering the top five in the list of imponderables.

With situations intensifying in several cases, the accompanying market jitters might serve to stymie any hopes of a material rally in risk assets (namely equities) as safe havens come into focus once again. Credit has so far avoided much of the periods of broader market volatility. Investors have found a way to manoeuvre the pitfalls, and have instead gorged on the copious amounts of deals as well as having clipped excellent corporate bond portfolio performance – that particular dynamic is unusual.

Euro-denominated IG credit has returned 6.7% year to date, sterling IG credit 11.2% and the AT1 market 12.3% (iBoxx). Non-financial IG corporate issuance levels have exceeded €250bn and we now have an eye now on the full-year record (€285bn/2009), while the HY market is closing in on last year’s €62bn total (currently at €48bn).

It’s been a good year so far for credit markets. That heavy supply/positive performance dynamic has been excellent for all-comers, as low and declining funding costs have boosted debt prices and borrowers have been effusive in their willingness to load up with cheap/free debt.

Of course, it’s going to continue for a long while yet as weak macro means that central bank accommodation will be forced to feed the junkie. Witness the €7.5bn of 5- and 10-year debt Italy sold on Friday – at their lowest ever funding costs with investors emboldened (or comforted) by the formation of a new coalition government.

For Q4, the ECB’s rate cut and, more importantly, renewed QE purchases will sustain the aforementioned dynamic. As we have stated in previous notes, when we reset the counter for 2020, performance must resemble something of a dustbowl whatever the vagaries of the supply dynamic. There must be some pressure on credit fundamentals because corporate profitability, which is already coming under pressure, will stay under pressure.

Investors will be comforted by those supportive funding conditions and the subsequent hoarding of cash which leaves the relative ability of corporates to service their debt obligations in good shape. Don’t expect the default rate to rise much from these current low levels.

Anyway, that’s for us to consider in December because, for now, we’re looking at adding to this year’s performance as IG corporate supply is anticipated to see a record high come year end.

Primary expects!

We’re most likely going to see deals from the start again this week, because it’s been the trend for a while now and we know that borrowers are lined up to pull the trigger. We closed last week’s final session with a trio of corporate transactions including Lloyds’ first euro-denominated deal, Greece’s Hellenic Petroleum offering and Renault’s benchmark.

Lloyds Bank issued €1bn in a 3-year at midswaps+75bp (-15bp versus IPT). Hellenic Petroleum took €500m in a 5-year to yield 2.125% (-12.5bp versus IPT, books €1.2bn) and Renault also issued €500m in an 8-year maturity priced at midswaps+150bp which was 15bp inside the initial guidance off books at €1.2bn.

For IG non-financials, the total volume of deals for this year to date has now risen to €251.3bn with September’s tally at €49.1bn. Monday’s deals should conclude this month’s final total somewhere in excess of €50bn, the first time that has happened in several years.

In high yield, we’re up at €11.2bn for the month and the first time the monthly figure has passed the €10bn mark since April 2018. For the year to date, it’s €48.6bn and on target, we think, to exceed last year’s second-best total on record of €62bn. The senior financial issuance deal flow has also been well above average seen these past few years, up at €131bn and ahead of 2018’s full-year total of €130bn.

Raising the stakes

Trump: Shaking things up again

Word at the end of last week that the Trump administration was considering plans to stop Chinese companies listing on Wall Street will manage, quite rightly, to raise the stakes in the trade war. It will escalate the conflict if carried out. And there will be repercussions for the markets.

After being in the black before the news emerged, the US markets lost ground and closed around 0.5% lower at the close. European markets managed to close ahead of the news up to 1% higher. It might be a different story on Monday if we play catch-up.

The Brexit drama continues to unfold and the economic consequences of it – as well as the ‘natural’ slowdown we are seeing as a result of the weakening outlook in global macro, propped up Gilts with the 10-year slightly better bid to yield 0.50% (-2bp). Sterling weakened after some dovish comments from one of the BoE’s chief hawks. The same maturity Bund closed to yield -0.57% (+1bp) while the Treasury yield closed at 1.69% (+1bp).

Credit indices closed unchanged with Main at 56.2bp and X-Over at 233bp.

Secondary is dull as dishwater and has been for a while. The focus is predominately on primary. The iBoxx IG cash index closed a touch better at B+124bp (-0.5bp), the AT1 market was unchanged (index at B+501bp) as was the high yield sector with the index at B+414bp.

As for this week, in the UK we have the Conservative Party conference and on Thursday the UK government sending its Brexit proposals to Brussels. It will no doubt all leak later in the day. There’s plenty on the economic front from the US, Europe and China and we wrap up the week with the non-farm payroll report (140k expectations).

Have a good day.

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.