30th September 2019

Fortune favours the brave

iTraxx Main

55.4bp, -0.8bp

iTraxx X-Over

233.3bp, +0.3bp

🇩🇪 10 Yr Bund

-0.57%, unchanged

iBoxx Corp IG

B+123.7bp, -0.3bp

iBoxx Corp HY

B+416bp, +2bp

🇺🇸 10 Yr US T-Bond

1.68%, +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″]

Chapter 10 up next…

Most of the corporate bond market’s performance in 2019 came in the first six months, but it’s still been a decent third quarter for credit. IG might have lost its way a little in September after the rate market unwind, but it still managed to come up with +1.2% in total returns for the 3-month period (iBoxx). There was also no small matter of having to absorb a massive €85bn of deals in non-financials and €34bn of senior issuance. The AT1 market gave +2.2% in the quarter, the high yield market +1.3% while the best in the class was sterling credit, where total returns came in at a sprightly +3.7% helped along by the sustained bid for the underlying.

We had another session where IG non-financials were absent from the market for only the third or fourth time in September, but there was a small HY borrower in the market as well as a notable deal from Royal London in sterling (subordinated). The weekend’s events in Hong Kong, the escalation in the trade dispute, another contraction in Chinese manufacturing in September and volatile UK politics all added to reasons to stay sidelined on the final day of the month.

So into the final quarter, we should be looking to see out the year holding on to most of the current performance. There is little need to change strategy now.

The ECB will be in the market come November and we would think that they ought to help prop the market up, although some investors might be tempted to sell into the ECB’s bid and take profits. We should be looking at around €45-50bn of IG non-financial issuance and the slowdown will also help to support secondary markets.

Fixed income performance resilient

IG return for the 9 months to end September came in at +6.8% on spreads 48bp tighter, and even after we lost 0.8% in total returns in September (with spreads 3bp wider). All that recent returns weakness came against the back of weakness in rate markets. IG credit has underperformed in September. But we think that it was a decent enough a result – broadly considering, especially when put against the €50bn of IG issuance which had been absorbed as well as the growing uncertainty on the geopolitical front, the ongoing US/China trade dispute, Brexit and weakening macro.

Sterling returns were flat in September with index spreads 3bp wider, but for the first nine months of 2019 sterling credit (iBoxx) has delivered +11.2% for investors.

There was a decent bid though for higher-yielding assets through September. The AT1 market thus remained relatively firm, with spreads in the iBoxx index 35bp tighter for the month, total returns at +0.9% in September and for the year to date up a massive 12.4% on spreads over 200bp tighter.

It’s a similar story in the high yield corporate market. Issuance for the year has been a hit and miss but we’ve managed to get very close to the €50bn mark so far, while spreads have tightened by 109bp with returns at a robust +8.8% year to date. Even in September, spreads have managed to tighten a little (-9bp) while returns have been flat (well, -0.1%).

Eurozone sovereigns continue to shine and will retain their lustre through to year-end given that the ECB is due to go shopping again from November. The small matter of poor macro and geopolitical risks will also help. The Eurozone lost 0.4% in returns in September, but investors are still sitting on returns of +10.4% year to date.

As for equities, the €Stoxx50 has gained 19.3%, Dax is up 14.9% YTD after it put on a little in September, with a similar uptick from the FTSE which is up by 10.3% year to end September. The S&P is up 18.6% or the first nine months while the Dow has gained 15.4%.

Blockbuster primary, record beckons

At €251bn year to end September, issuance in the IG non-financial markets is heading for a record total for the full year. The €285bn post-crisis funding hoard by desperate corporates – feeling a liquidity pinch in 2009, is about to be broken. In fact, we’re heading for €300bn+ for the year as treasury desks opportunistically pre-fund obligations which might not be maturing for another 12 months. Spreads are not at record low levels, but funding costs are as rate markets have rallied hard this year.

September’s IG non-financial corporate bond issuance at €49bn marks it as the best month since 2014, where €50bn+ is easily achievable in the final quarter as a whole – even if the markets generally start to wobble in the face of macro and/or geopolitical event risk.

Reverse Yankee issuance has seen a glut of US borrowers in the market, and they are now responsible for a record 32.1% of the total deal flow (€81bn).

Danaher took €6.25bn in a 5-tranche deal and Thermo Fisher €4.4bn also in 5 tranches. Dassault (€3.65bn), AT&T (€3bn), GlaxoSmithkline (€2.5bn, all front end), Telenor and Schlumberger (€1.5bn each) all took three tranches for their hoard, while Wintershall Dea was the sole 4-tranche transactor for €4bn.

It’s taken 17 months, but we finally have high yield issuance in a month breaking through the €10bn barrier. September’s total came in at €11.2bn and the best monthly total since April 2018’s €11.4bn. For the year to end September, we’re up at €48.6bn and we believe on course to exceed (against our previous expectations) 2018’s total of €62bn – which was the second best year for issuance on record.

The senior supply metrics, with issuance for the year at €131bn, have already exceeded the total for the whole of last year (€130bn) and we are on course for somewhere in the region of €150bn when taking into account the usual seasonal slowdown in funding. Anything more than €145bn would mark this year as the best since 2015.

Quiet end to an otherwise satisfying quarter

Equities had a moderately positive session to bring things for the month to a close, just as rate markets traded flat. The 10-year Bund yield signed off the quarter at -0.57% (unchanged) with the Treasury yield up a touch at 1.68% (+1bp). Gilts were better bid, though, the 10-year left at 0.48% at the close (-2bp)

In credit primary, the sole corporate bond was in high yield and came from Finland’s Vapo Oy with its €100m, 5-year deal priced at midswaps+265bp. There was nothing from senior financials or from IG non-financials. AMCO Asset Management issued €600m in a long 5-year at BTPs+120bp and Demire Real Estate issued €550m also in a 5-year to yield 2%.

The only other deal came from Royal London which printed £600m in a 30NC20 Tier 2 at G+410bp, which was 25bp inside the opening guidance, off a £1.5bn book.

As for synthetic index, iTraxx Main closed 0.8bp lower at 55.4bp and X-Over 0.3bp higher at 233.3bp, with really nothing much happening in the session.

The IG iBoxx cash index closed at B+123.7bp (-0.3bp) and 3bp wider in September, with the HY market 2bp wider (noise) at B+416bp (+2bp).

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.