28th June 2018

First half ending on a bum note

iTraxx Main

75.8bp, +2bp

iTraxx X-Over

329.1bp, +8.3bp

🇩🇪 10 Yr Bund

0.31%, -1bp

iBoxx Corp IG

B+136.7bp, +2.2bp

iBoxx Corp HY

B+418bp, +8bp

🇺🇸 10 Yr US T-Bond

2.84%, +1bp

🇬🇧 FTSE 100 [wp_live_scraper id=”4″], [wp_live_scraper id=”5″] 🇩🇪 DAX [wp_live_scraper id=”12″], [wp_live_scraper id=”13″] 🇺🇸 S&P 500 [wp_live_scraper id=”15″], [wp_live_scraper id=”16″]

We can work it out…

There’s nothing like a drive-by borrower getting a deal in while the markets are riled, with another sneaking one away as well as it tags along in its slipstream. Those two borrowers in Thursday’s session were BP with a three-tranche offering and O2 Telefonica Deutschland. Importantly, it just goes to show that the window is open for non-financial corporate borrowers in IG as judged by the investor interest for the risk on offer. Otherwise, it was yet another difficult session for risk assets as the ramifications of the likely global trade war play out.

Chinese stocks continued their decline as did its currency against the dollar peg. European stocks followed suit and will certainly close the month and first half of the year in the red. The DAX was off almost 2% at one stage, for example. Rates were slightly better bid in the session and the 10-year benchmark Bund yield once again saw 0.30% intraday.

The week’s final session is unlikely going to offer us much in terms of a recovery – nor are we going to go into the second half hopeful that things might change for the better. We’re awaiting the details of the EU summit where some apprehension as to whether a deal on immigration can be agreed likely helped the better bid for bunds, given that Merkel is seen by many as fighting for her political life. The Visegrád group of countries along with Austria and Italy appear in no mood to let up in their demands and a typical EU fudge probably won’t do.

IG credit at least is flattish for the month from a total return perspective, although spreads have been under a little pressure of late. It’s difficult to have a good read on the corporate bond markets in the sense that spreads are better offered, but there is tremendous demand for most primary offerings, investors have enough cash on the sidelines to be able to support the market and the ECB is still plucking €1bn of non-financial debt out of the market every week.

Yet we have succumbed to the weakness seen in most other risk markets with spreads almost 40bp tighter this year in IG (iBoxx index) when all of those technicals are in our favour. Fundamentals are also in favour of the corporate bond markets given the still low level of corporate defaults, limited rating transmission risks, low funding costs and the levels of balance sheet liquidity corporates are flush with.

Is the economic cycle at some kind of a turning point and we’re playing catch-up with the reality of a recession (or worse) to come in 2019? Are spreads just too tight as a result?

Primary’s last stand – for this week

We’re not too hopeful that the first half’s final session will deliver much, or anything, in primary. So we might have to be content with the pickings given to us on Thursday. BP came with a three-tranche dual currency offering made up of a €1bn, 6-year priced at midswaps+50bp which was 15bp inside the opening guidance off a €2.3bn book. The other euro-denominated tranche was €900m in a 10-year at midswaps+72bp and 13bp inside the opening talk, with books at €1.7bn. The sterling tranche for £450m garnered a £800m book, and the 8-year deal was rocked at G+108bp (-7bp versus IPT).

The deal of the day probably came from O2 Telefonica Deutschland which lifted €600m in a 7-year at midswaps+127bp. That was an impressive price gain versus the midswaps+150bp opening guidance. And it was possible after managing to build an impressive €2.8bn book. In all, we have had an unimpressive €22.5bn of IG non-financial issuance in June which has actually tied into the fairly lower level than expected issuance for the year so far.

In financials, Raiffeisen Bank International AG issued €500m in a 3-year at midswaps+40bp. High yield markets priced BWAY Holding at 4.75% for €475m in an April 2024 maturity – and a total €6.6bn of deals this month.

EU summit keeps markets on defensive

The EU summit didn’t hold any barriers for Italian markets as the 10-year BTP yield declined to 2.79% (-4bp) while the sovereign sold 5- and 7-year debt in the session. The benchmark Bund yield in the 10-year maturity declined a basis point to 0.31%, Gilts were unchanged to yield 1.25% and US Treasuries were at 2.84% (+1bp).

Equities came off their worst levels for the session, the DAX closing 1.3% lower, the FTSE flat and Italian markets lower by 0.6%. The US equity markets were up to 0.5% in the black for the day, as at the time of writing.

With equities on the back foot, it was no surprise that protection costs would rise. The indices widened to around their contract highs, with Main up another 2bp to 75.8bp and X-Over 8.3bp higher at 329.1bp.

In cash, the IG market also widened again by another 2bp to B+136.7bp leaving us 4bp wider this month with the weakness now being felt across the sterling markets and that index up at B+163.8bp, also 4bp wider this month. In high yield, the index moved 8bp higher to B+418bp and the highest level this year (+132bp YTD). Sounds ominous.

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.