- by Suki Mann
|🇩🇪 10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY
|🇺🇸 10 Yr US T-Bond
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Limp credit markets…
It’s been the limpest of weeks as far as activity has been concerned, although for credit market participants they’re at least grateful for the squeeze in spreads which has given some excellent early year performance. We’re not buying into the excuse that the earnings season has curtailed primary activity, because only a small proportion of companies are currently in blackout. However, that lack of deal flow is directly responsible for the huge squeeze in spreads, as is traditionally the case that investors have plenty of cash to invest so early in the year – and want to put it to work. It helps also that equities are holding steady, up by 6% or so and weakening macro is keeping duration supported with market yields anchored at low levels.
There were some improved signs of life in primary in Thursday’s session, but that’s about all it was. Imperial Brands was in the market for a dual tranche deal while Spain’s Bankia was present for a subordinated offering. The opening week of the month this has delivered very little in corporate primary and the overall picture is one where we think the level of deal flow is going to decline this year versus even last year’s poorer levels.
That said, the one fear for investors will be that this week’s reduced level of activity is a harbinger of things to come. In the halcyon, low rates accommodative central bank policy post-crisis years, the IG non-financial corporate sector hoovered copious levels of low costs funding – and hoarded it. QE subsequently opened up the high yield market as investors were crowded out of the IG market and this enabled a record level of deals in 2017, followed by the second best year for deals ever in 2018.
The market is set up to take down €250bn or so of IG non-financial debt on a gross basis. Last year we managed to achieve just €220bn and we believe that 2019 will see another decline to around the €200bn area. Assuming no collapse in macro – and just a slowdown with a policy response propping up risk assets, then spreads ought to continue their squeeze.
Growth forecasts slashed
The big news on the macro front and which rightly dominated – and will continue to dominate – over the coming months was the eye-watering downgrade in growth expectations as seen by the European Commission. It was a shocker and highlights the problems facing not just Italy (although the cut was severest here), but the Eurozone as a whole.
So they slashed growth expectations for 2019 from 1.2% previously to just 0.2% for Italy! And we think even that might be too high. The projected gloomy forecast is going to affect the projected budget deficit and the Rome government will miss it by a long shot. The problem now is does Italy get some leeway and is allowed to miss the target, or will they be ‘forced’ to cut spending to realign the deficit target closer to the 2% level?
It is going to set up a further confrontation between the respective parties. Someone will need to cede some ground somewhere. The markets reacted. Italian 10-year debt sold off, leaving the 10-year yield up at 2.92% (+8bp) and comes after the sovereign has sold €18bn of debt in the capital markets this year with books for the two combined deals exceeding €70bn.
The EC also cut the growth rate for the Eurozone, to 1.3% for 2019 from 1.9% previously. German growth forecasts were cut to 1.8% to 1.1%. The ECB will be called into action sooner rather than later.
Flight to safety was the name of the game in the session. The 10-year Bund yield crashed 5bp lower to 0.11% and to the lowest level since Q3 2016, where it turned negative. It is not going to take much for that to happen again. In the US, the 10-year Treasury yield also dropped, to 2.66% (-4bp).
With no breakthrough on the Brexit Withdrawal Agreement, there was also a good bid for Gilts and the yield on the 10-year declined to 1.18% (-4bp). The BoE also kept rates unchanged, downgraded its own growth forecasts for the UK (to 1.2% from 1.7%) and retreated from plans for multiple rate increases over the medium term.
In equities, the Dax fell by 2.7% and Italian equities declined by 2.6%. The FTSE was a relative outperformer (-1.1% only) helped by a weaker sterling which was trading off a $1.28 handle. In the US, the session was also a weak one, with stocks off by around 1.3% as at the time of writing.
Holding steady on credit for now
In primary, Bankia issued €1bn of T2 debt in a 10NC5 format to yield 3.75% (-37.5bp versus IPT) and accumulated an order book of over €3.35bn.
In the IG non-financial sector, Imperial Brands issued €750m in a 4.5-year maturity at midswaps+118bp (-17bp versus IPT) and €750m in an 8-year at midswaps+178bp (also -17bp versus IPT) with combined interest of over €4.4bn for the transaction. That makes it just three individual IG non-financial tranches printed so far this month, for €2.3bn although Altria is due – quite possibly on Friday. The other deal of note in the session came in the high yield market and was the increased €200m tap of its 5% Oct 2023 issue from DiGi Communications.
The weakness in stocks made for some better buying of protection and spreads went higher. iTraxx Main moved 3.2bp higher to 73bp and X-Over gave up 10.6bp to 317.4bp at the close.
Secondary cash in IG experienced its first daily reversal in almost a month with spreads 1.6bp wider (iBoxx), leaving the index at B+153.7bp, although the massive rally in the underlying helped push returns higher (now at +1.7% year to date). All the gains seen in the previous session in the CoCo market were faded as the euphoria of the Santander dollar AT1 issue faded.
And we closed the same way in high yield as the index moved 8bp wider to B+483.7bp amid little flow but the Street in defensive move given that big reversal in equities. We might get that Altria deal on Friday, but otherwise we can expect a quieter session to close the week.
Have a good day.