25th June 2019

Fixed… income, really!

iTraxx Main

54.8bp, +0.6bp

iTraxx X-Over

261.5bp, +4.7bp

🇩🇪 10 Yr Bund

-0.33%, -2bp

iBoxx Corp IG

B+125.3bp, unchanged

iBoxx Corp HY

B+426.5bp, +6bp

🇺🇸 10 Yr US T-Bond

1.99%, -3bp

🇬🇧 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″]

Snoozing to the halfway point…

It looks as if the G20 meeting has come at just the most opportune of times, clearly leaving the markets unwilling to take a significant directional view as investors wait to see how any meeting between Trump and Xi turns out.

We’re not quite treading water in the strictest of interpretations, but risk markets are not doing too much while there has been a better bid for safe havens. So it’s all come at a good moment because we are going to see out the first half with all markets delivering for investors, amid high degrees of macro and geopolitical uncertainties. Strange, that.

Xi Jinping

There’s a good chance that the G20 will yield very little in concrete terms as far as the trade talks go. Sure, Trump will tweet how great his relationship is with China’s Xi and that a trade deal can be done but in a week or so, no doubt, there will be something to the contrary regards a trade deal. The Iranian situation continues to stir and once the new sanction regime begins to bite, we can anticipate another altercation. And so it goes on…

While those and other geopolitical situations play out, Rome burns. The Eurozone economy remains in the doldrums and by all accounts continues to weaken, with German weakness spreading wider and deeper across the region. Nothing is going to change through the third quarter and we think existing strategies ought to remain place.

Weaker economic data prints throughout will increase the pressure on the Fed to act in that end of July FOMC meeting. Rates, therefore, remain underpinned at these levels and more than likely go lower. In credit, activity will eventually decline through mid/late July and August as primary slows and secondary activity dwindles close to zero. Credit spreads will very likely grind tighter throughout this period.

Medtronic is back to dominate in primary

There’s no keeping them away. Medtronic, the world’s largest medical device company, became the largest borrower this year in the euro markets as it returned for another dose of acquisition financing, with a 6-tranche multi-billion euro deal. In March, the US group raided the market for €6.5bn in a 5-part euro-denominated transaction.

Medtronic steal the headlines

Medtronic’s 6-tranche issue included a tap of the March 2021s for €250m at Euribor+20bp (-15bp versus IPT). The rest comprised a long 3-year at midswaps+30bp (-25bp versus IPT) for €750m and a 6-year deal at midswaps+50bp (-25bp versus the initial talk) for €1bn.

There was another €1bn in a 12-year at midswaps+68bp (-27bp versus IPT) and the next €1bn in a 20-year at midswaps+90bp (-25bp versus IPT). The final €1bn tranche cost midswaps+115bp (-35bp versus the initial talk) in a 30-year maturity and in all, the borrower issued €5bn. Combined order books were up at €23.7bn.

The deals took us over the line, this month now being the heaviest June for issuance of IG non-financial debt since 2014 – and we are on course for it being the best single month since May 2016 (effectively just a print away). And deals are performing for the most part, promoting a high degree of confidence which ought to overcome investor fears of indigestion setting in.

The other IG non-financial deal was from US warehousing group Prologis, as it issued an increased €450m in a 10-year green bond at midswaps+75bp. Books were up at €1.8bn and 35bp was lopped off the original guidance into final pricing.

The combined deals take the reverse yankee interest in the euro-denominated corporate bond market to €55bn this year, or 34% of the total issued versus a long-term average somewhere in the region of 12-18% for any given year. French-domiciled borrowers (22%) and German corporates (15%) take up the number two and three spots, respectively.

Elsewhere, Standard Chartered printed €500m in a sustainable 8NC7 issue at midswaps+100bp and BNP issued €1bn, in 12-year maturity Tier 2 debt at midswaps+130bp (-40bp versus IPT). Finally, the Republic of Chile took €861m in a 12-year green bond at midswaps+50bp.

It’s inevitable now

No kidding, safety first. We are snoozing into the end of the first half of the year from an activity viewpoint, and just as well we had Medtronic’s issue to contend with. Safe havens were in the ascendancy as well, setting a new intraday record low for the 10-year benchmark Bund yield in the process.

So, we are at -0.33% for that 10-year (a closing record low) and we could be through the -0.40% level next week, if we get anything other than an upbeat initial assessment over the weekend from any G20 US/China side meeting. That doesn’t mean that we won’t get there anyway because, given the difficult and deteriorating macro outlook, we are well on the way.

So, the yield on 10-year Gilts broke 0.80% again and closed at 0.79% (-3bp) while the 10-year Treasury yield dropped to 1.99% (-3bp). The 10-year OAT also fell into negative territory, at -0.007% (-3bp) at the close, and just a shade off the intraday record low of -0.01%. By the way, it’s just a paltry 4bp of yield on the 20-year Bund.

Each notch higher in government bond prices means that returns for credit market investors also edge higher, while benchmarked investors also perform as demand for product see a continued spread squeeze. Win-win for the moment.

Equities were up to 0.4% lower in Europe through a drab session for them, almost as if they’ve run out of steam following a very good first half for them. In the US, they were also in the red by up to 0.7%, as at the time of writing.

Credit index took its cue from equities and protection costs edged a little higher for the second successive session, which left iTraxx Main at 54.8bp (+0.6bp) as X-Over rose 4.7bp to 261.5bp.

The cash market was obviously focused on primary issuance and closed unchanged din IG, with the index left at B+125.2bp, although we had the slightest bit of weakness in the AT1 market (noise). The IG iBoxx index yield fell to a record low of 0.73%. The sterling market also closed unchanged, the index yield fell to 2.60% and is just 30bp away from the record low.

And finally, in the high yield market, we had a bit of weakness, but again it was just in line with a defensive Street following the general modest weakness in equities. The HY Markit iBoxx index closed at B+426.6bp (+6bp).

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.