19th October 2017

Go with the flow

MARKET CLOSE:
iTraxx Main

56.3bp, +1.4bp

iTraxx X-Over

246.4bp, +4.2bp

10 Yr Bund

0.40%, unchanged

iBoxx Corp IG

B+103.6bp, +0.1bp

iBoxx Corp HY

B+267.3bp, +0.8bp

10 Yr US T-Bond

2.32%, -2bp

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=”10″], [wp_live_scraper id=”11″]

It’s a known unknown…

Spanish woes didn’t quite grip the markets in the penultimate session of the week as they could have, with the Madrid government set to postpone Catalonia’s autonomy and impose direct rule over the region. Although it could be viewed as an internal, domestic matter, the repercussions are not lost on the EU following the UK referendum and the vote to leave the EU.

But the markets did react – after all, it is one of those uncertain moments that they don’t like.  Equities dropped by up to 0.8% – which might seem a small amount, but we haven’t seen a decline like this for a while. Although small, there was a better bid for safe-havens which saw government bond yields edge lower, although the biggest move came in Gilts with the 10-year down at 1.27% (-5bp). That wasn’t because of Spain/Catalonia, but we think on the poor retail sales figures for September. The UK economy is in bit of a bind at the moment, and that November rate hike is in the balance.

€500m in a 7-year maturity from the Milan-based industrial group

Anyway, Spanish protection costs might have risen (2-3bp in the session – noise), but bond yields didn’t move while the IBEX was only down in line with other Eurozone bourses. The defensive mood in the market didn’t quite quash activity in the credit market although we saw just a couple of deals worth a mention. And one of those was from the periphery – and in high yield – suggesting that investors are in no way running scared of the unfolding situation in Spain.

Italian industrial and civil engineering group Salini Impregilo issued €500m in a 7-year maturity, costing 1.75% and which was priced 25bp inside the initial guidance. The book was at over €2.6bn, supporting the view that demand for higher yielding risk assets is massive. Wednesday’s inaugural deal from Italian retailer Esselunga which raised €1bn in a dual tranche offering was 9x oversubscribed.

 


‘Hot’ credit market

The markets are what bond originators at banks would describe as ‘hot’. Yet issuance levels are only staying at elevated levels – come what may – for the high yield market, which has seen €5.9bn printed this month. The year-to-date tally is now up at €54bn and we are now just €3bn shy of the €57bn record seen in 2014. The Wind Tre deal will likely take us over the line.

There was nothing in the session once again from IG corporates, where the non-financial total is at €219bn for this year which is a considerable way short of the expectations many have. Our own view was that €260bn+ was likely this year, but the corporate investment grade primary markets have been hit and miss all year. The month so far has seen just €9bn of issuance with a week to go, meaning that we are heading for one of the lowest totals for any October in the non-financial IG market (and we know Verizon is coming).

The day’s other deal in the market came from Belfius Bank which returned with another senior non-preferred deal, this time in a 7-year maturity for €500m.

Generally, we think that the markets will work their way through the Spanish ‘crisis’ just like they have the many other events which might (in other periods) have caused some sort of longer-lasting derailment. In a sense, the situation is a ‘known unknown’ and we’re likely viewing it as too small to matter.

So we’re still waiting for the ‘big one’ which might lead to that greater negative impact. It’s out there, somewhere. But it could be a long wait before it hits us, so in the meantime, we take on more risk.


Amid warnings from China

Otherwise, the session also saw investors take a step back also on warnings from the PBOC Governor that the Chinese markets might be heading for their Minsky moment amid excessive rises in household debt and credit growth. So the US opened by taking a leg lower, but managed to recover off the lows and the session petered out into an unchanged one for the most part.

That meant a slightly better bid for government bonds and, as well as Gilts were well-bid up, we saw US Treasury yields decline by a decent margin initially. That was before a small recovery which left the 1o-year yielding 2.32% (-2bp). In Europe, Bunds didn’t do much, left at around a yield of 0.40% (unchanged) and while Bonos were also unchanged, Italian BTPs had a slightly better time of it, yields on the 10-year dropping to 2.03% (-2bp).

In credit, the synthetics moved higher into the cautious tone, as the cost of credit protection rose. That was a fairly predictable move. iTraxx Main was up at 56.3bp (+1.4bp) and X-Over rose 4.2bp to 246.4bp.

Overall, it’s been a good week for corporate bonds from a performance perspective with fresh record tights set in several areas of the asset class. For the cash markets, we closed unchanged to slightly better offered in IG which left the index at B+103.6bp (+0.1bp) in a quiet session, but one which serves to highlight how resolute the corporate bond market is to moderate bouts of weakness that might be afflicting other markets. Even the higher yielding, usually more volatile CoCo market closed unchanged.

Spreads in the IG index might only be a basis point or so tighter this week but it’s 13bp for the CoCo index and 8bp in the high yield market – which closed Thursday’s session at B+267.3bp (+0.8bp).

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.