31st August 2017

Fixed income tops list

iTraxx Main

54.9bp, -0.5bp

iTraxx X-Over

236.5bp, -6.5bp

10 Yr Bund

0.36%, unchanged

iBoxx Corp IG

B+111.4bp, +0.5bp

iBoxx Corp HY

B+298.3bp, -1.5bp

10 Yr US T-Bond

2.13%, -1bp

FTSE 100 (live) [stock_ticker symbols=”INDEXFTSE:UKX”  static=”1″ nolink=”1″] DAX (live) [stock_ticker symbols=”INDEXDB:DAX”  static=”1″ nolink=”1″] S&P 500 (live) [stock_ticker symbols=”INDEXSP:.INX”  static=”1″ nolink=”1″]

Safety has been the name of the game…

Performance for the different asset classes highlights the more difficult month for risk assets in August. Rising tensions in east Asia have been the main driving force for the weaker equity market performance while allowing for a more supportive bid for government bonds. Eurozone government bonds, for example, have returned around +0.8% in August and IG credit some +0.6%.

In fact, government bond returns (Markit iBoxx) are now flat in the year to date and have been negative all year through to the end of July. Equities are flat (FTSE) in August to in the red by a small amount (DAX, S&P etc), and the correlation with high yield pricing has seen to it that even high yield has underperformed, returning just +0.2% in the month (and the CoCo index flat).

While investors worked out their performance levels, there was much to contend with in primary. We ended the month on a high with a decent level of issuance. Kimberly Clark, Philips NV, Scania CV and CNH Industrial piped up in the IG non-financials market, while Mitsubishi UFJ and Caixabank added to the senior financial debt offerings – of which there had already been €6bn this week. Barclays chipped in with the month’s only subordinated debt deal.

For good measure, we also had a couple of REITs in the form of Fastighets AB and Vonovia Finance for a combined €1bn and German leasing group Grenke for just €200m. Fastighets also issued a €350m hybrid 60NC5.5 deal to yield 3.125% (-37.5bp inside IPT).

With non-farms up on Friday and Labor Day in the US on Friday, we’re into a quieter few days but we are set up now for a potential blockbuster of a September for primary. That will feed into improved secondary valuations as confidence levels rise – and if we can keep geopolitical concerns at bay – leading also to some correction in the performance of higher beta credit (high yield, CoCos) affected previously by secondary market illiquidity and choppier equities.

August primary ends with a flourish

Not to be sneezed at: €500m deal from the Kleenex manufacturer

The deals gushed for the first time in weeks. Kimberly Clark issued €500m in a 7-year deal some 15bp inside the initial guidance to end at midswaps+25bp. Dutch group Philips lifted a combined €1bn in a 2-tranche effort taking in a 2-year floater and a 6-year fixed at midswaps+30bp – and also 15bp inside the opening pricing gambit.

Staying with the current short-end demand for floating paper as some investors seek to lock-in protection against the potential for rising rates, Scania took €500m also in a two-year floating structure at Euribor+22bp (-13bp versus IPT). CNH followed up with an 8-year maturity transaction, paying midswaps+130bp (-20bp versus IPT) for €650m.

In financials, Mitsubishi took €750m in 7-year funding at midswaps+45bp and Caixabank €1.25bn in a long 5-year senior non-preferred deal. Barclays’ 10NC5 Tier 2 deal totalled €1.5bn at midswaps+190bp (-0bp versus initial guidance). Not leaving out the sterling market, Shaftesbury PLC through Shaftesbury Chinatown, issued £290m at G+127bp in a 10-year maturity. The high yield market drew another blank.

The total supply figures for August thus end like so: IG non-financials came in at €8.2bn, high yield at €625m from just two deals and senior financials at a respectable €8bn following that late flurry of deals this week. On a year to date basis, the IG non-financial total is up at €183.8bn, whereas the high yield issuance total stands at €39.4bn at we close out August.

As for senior financials, this more erratic supply dynamic leaves the total for the first 8 months of issuance finally through the €100bn barrier at €101.6bn.

Goldilocks reigns supreme in macro

Elsewhere, the data wasn’t too bad with German unemployment left unchanged at a record low level of 5.7%, as did the Eurozone’s rate at 9.1% (Italian unemployment rose, though) in August. Eurozone inflation rose to 1.5% but the core rate was unchanged at 1.2% (target 2%). The ECB governing council hooks up next week. French retailing took bit of a hit after first half results from Carrefour missed and its stock dropped 12% at one stage.

In the US, personal incomes rose by a better than expected 0.4% MoM in July, personal spending fell short of expectations, rising by only 0.3% in the same period. Core PCE was up 1.4% in the year to July, still well shy of the Fed’s 2% target rate.

That all left equities to close the month’s final session in the black but as suggested above, returns have mostly been negative for the August. Rates markets were stable, to perhaps better bid, and returns here are the pick of the bunch of the various macro-like asset classes. 10-year US Treasury yields sit at 2.13% (-1bp in the session), Bunds at o.36% (unchanged) and Gilts yield 1.03% (unchanged).

In line with the risk-on moment in the market along with some closing out of positions at month-end, the iTraxx indices closed better offered (lower) with Main at 54.9bp (-0.5bp) and X-Over at 236.5bp (-6.5bp).

The secondary corporate cash market spreads edged a touch wider leaving the Markit iBoxx index for IG risk at B+111.4bp (+8bp in August – surprisingly). The high yield index closed a touch tighter at B+298.3bp (+20bp in the month). Most of the sessions focus was the primary market.

We will be back with a full round-up of the month/YTD performance and supply updates in Monday morning’s comment.  Have a good day and weekend.

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.