12th June 2019

Game of Bonds

iTraxx Main

61.2bp, +0.8bp

iTraxx X-Over

270.8bp, +3.3bp

🇩🇪 10 Yr Bund

-0.235%, unchanged

iBoxx Corp IG

B+133.3bp, unchanged

iBoxx Corp HY

B+450bp, +3bp

🇺🇸 10 Yr US T-Bond

2.12%, -2bp

🇬🇧 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″]

Busy primary keeps credit in focus…

Once again there was a strong financial flavour to the primary credit market with an added spice from SSA and covered bond issuance. As for the rest, hopes that the previous session was the start of something brighter was done away with, as all the old fears surfaced and were used as an excuse to explain the ills of the market.

Credit investors at least have nailed their colours to the mast and can retain comfort that taking down corporate bond debt is a good defensive strategy – which will reap the rewards in 2019. After all, the AT1 market has upped its game and dished out 8% total returns year to date, while IG’s 4.5% is both remarkable and actually looks sustainable.

Judging by the demand for the day’s deals, especially the peripheral sovereign offerings, there is a massive grab for yield. Fear from fixed income investors as to the downside risks as they hunt for that juicy return is brushed aside. For now, those risks are minimal because declining core Eurozone sovereign yields are dragging peripheral yields lower as well – or, at least, increasing the lure of peripheral risk.

The natural extension following on from the SSA market is to the corporate bond market. Hence the recovery in spreads, performance and sustained solid interest investors have for primary assets. We’re back in squeeze territory whereby moderate levels of weakness in equities are not going to feed into spread weakness.

The illiquidity in the secondary market will see to that. Selling into weakness in the hope of buying back later is a costly exercise. Few will do it. The IG market, for example, tightened 50bp in the period to end April this year, gave back around 25bp of it through May but is now back in tightening mode and is 37bp year to date (iBoxx index).

Our view is to stay with it and keep that higher beta bias in positioning/exposure. There is still some more performance to be had from this market. We are nowhere near the tights in spreads which previously were manipulated through the ECB’s QE corporate bond grab.

The Fed is likely to oblige the market and cut rates – maybe not in next week’s meeting – but the market is pricing in a cut in rates in the July meeting. There will be a follow-through in Europe, and we still believe that the benchmark 10-year Bund yield will see -0.30% (although that’s not such a brave call).

Financials and sovereigns dominate in primary

Financials, covered bonds and sovereign deals littered the screens in the session. BBVA issued €1bn in a 7-year senior non-preferred deal costing midswaps+103bp (-17bp versus IPT). OP Corporate Bank lifted €500m also in senior non-preferred debt at midswaps+60bp for a 5-year maturity (-20bp versus IPT). Oberbank issued €250m in a 7-year preferred at midswaps+75bp (-5bp versus IPT). Finally, it was Banco Santander with a 5-year senior preferred deal for €1.25bn at midswaps+50bp (-10bp versus IPT).

That flurry of senior deals was added to by Bright Food Singapore in the IG non-financial sector, which took €500m at midswaps+160bp in a 5-year (books €2.2bn, final pricing -20bp versus IPT). VW Group entity, VW Leasing, issued 3-year and 7-year maturity debt for €1.1bn and €650m, priced at midswaps+88bp and midswaps+160bp, respectively.

The deals in the corporate sector probably being the most interesting of the day came from Berkshire Hathaway’s dual tranche sterling debut offering. The US investment group took £1bn in a 20-year at G+110bp (-15bp versus IPT) and £750m in a 40-year tranche at G+125bp (-15bp versus IPT). Books were at £3.2bn and £2.1bn for the two tranches, respectively.

Summer is coming: Croatia printed €1.5bn

In the sovereign arena, Spain issued €6bn in a long 10-year at midswaps+33bp, generating demand of 31bn in the process. Italy was also in for €6bn in a 2040 maturity offering at BTPs+12bp, with books at over €23.5bn. Lithuania issued €650m at midswaps+33bp and €850m at midswaps+88bp for 10-year and 30-year maturities, respectively. Combined books came in at just under €4bn.

Bringing up the rear in a busy session for sovereign issuance was Croatia with €1.5bn printed at midswaps+105bp in a 10-year maturity (books at €6.4bn).

The rest was covered bond issuance with RBC, SP Mortgage Bank, Aareal Bank and Bawag all in the market.

Nervously looking over one’s shoulder

Low inflation is good in the world according to Trump, and his protestations saw US CPI moderate to 1.8% in May year-on-year, from the 2% rate in April and against expectations of 1.9%. Month-on-month, the rate declined 0.1% in line with expectations but down from 0.3% in April. The core rate fell to 2%.

The markets were not particularly moved on the news in what otherwise turned out to be a rather drab session. Equities moved lower and stayed that way throughout, the European bourses around 0.4% lower and the US indices were in the red by up to 0.5%, as at the time of writing.

It was a similar story in the rates markets. That inflation data didn’t have much impact but growing US oil stockpiles and a continuation of the recent slide in oil prices might have. The 10-year US Treasury yield edged to 2.12% (-2bp), the equivalent maturity Bund yield was unchanged at -0.235% having seen -0.248% earlier in the day.

The slightly weaker tone pushed protection costs a touch higher and reversed the previous day’s gains. iTraxx Main closed at 61.2bp (+0.8bp) and X-Over was 3.3bp higher at B+270.8bp.

Secondary cash in IG did very little and the index closed unchanged at B+133.3bp and there was a touch of weakness in the higher beta AT1 market (noise really). As for high yield, it was also a limited session and we edged wider for choice, the index left at B+450bp (+3bp).

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.