9th January 2019

Happy New Year?.. Oh yes!

iTraxx Main

82.9bp, -2.9bp

iTraxx X-Over

335.4bp, -10.2bp

🇩🇪 10 Yr Bund

0.22%, -1bp

iBoxx Corp IG

B+179.8bp, -1bp

iBoxx Corp HY

B+516bp, -10bp

🇺🇸 10 Yr US T-Bond

2.73%, +1.5bp

🇬🇧 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″]

Ain’t no stopping them…

Another solidly positive session, leaving risk assets continuing with their rally. Who would have believed the Dax being up 3% already this year, especially given all the fears we have of a mounting slowdown in macro? The US/China trade talks reaching some kind of an agreement is the sole driver, because all the data suggests Germany and the Eurozone overall is slowing – and heading potentially for recession. The FTSE likewise is close on 3% higher in these early bulled-up sessions, but the hopes here are for one of a Brexit trade deal, no Brexit or a delays to Brexit which might lead to no-deal. Better the devil you know keeps the market buzzing along.

Credit primary was certainly buzzing along, although the IG non-financial sector only delivered a sole (non-government owned) corporate deal while we also had a single senior plain vanilla bank offering. The receptivity to the deal was excellent and we can safely conclude that the timing by Schneider Electric was fantastic (7x subscribed – and at the tight end of the guidance!). It also showed that for the right borrower, when the timing is right and the broad sentiment in the market is positive, the demand is there. Investor fear of missing out is always good, for borrowers.

The covered bond sector was extremely busy as was the SSA space, with no less than three euro-denominated sovereign deals. For corporates, it was probably a good thing that we slowed, as it would have given investors an opportunity to absorb the flurry of deals (€6.65bn including Wednesday’s Schneider Electric deal).

Macro was a little lighter in the session, but news that the Eurozone’s unemployment rate had slipped below 8% for the first time in over a decade was good news. As in the US, the employment appears resolute even if the economy is coming off the boil, with gains seen across all the region’s various countries year-on-year.

Primary’s little flurry continues

So Schneider Electric nailed it with a 9-year maturity deal priced at midswaps+78bp for €500m. The order book was up at €3.5bn, the deal was unopposed in the session by any other IG non-financial effort and Schneider will have been pleased with the day’s work. The group’s last deal was also a 9-year maturity, back in June last year and was priced at midswaps+60bp. So all being told, given the severe back up in the market since, that is still a very good funding level for them.

Majority state-owned Deutsche Bahn issued €1bn in a short 10-year at midswaps+40bp. In financials, Credit Agricole went for 3-year senior preferred funding, for €1.5bn at Euribor+55bp. January is usually the heaviest month of the year and senior bank issuance usually has tailed off exponentially as the year has progressed (post-crisis). We’re up at €9bn so far this month (2018’s issuance for January was over €30bn).

Senior Financials Monthly Supply

The sovereign issues in the day came from Ireland (€4bn, long 10-year, midswaps+27bp, books above €18bn), Portugal (€4bn, long 10-year, midswaps+112bp, books above €24bn) and Israel (dual tranche 10-year and 30-year at midswaps+75bp and +115bp, respectively, for a combined €2.5bn). The Province of Alberta pitched in with €1.5bn of its own in a 7-year at midswaps+20bp.

Positive tone continues

The markets were once again in good form as judged by the moves in equities, the barometer for sentiment. The Dax led the way, higher again by up to 0.8% with other European bourses doing pretty much the same. The S&P was also in positive territory as at the time of writing. From Rosengren to Bullard Fed governors were talking up the market during the session.

Rates, though, were not getting carried away with it. Gilts were slightly better bid as Parliament debated amendments to the Brexit legislation (and injected more uncertainty into the process), with the 10-year left to yield 1.25%. The Bund yield likewise in the same maturity edged a touch lower to 0.22% (-1bp), with US Treasuries yielding 2.73% (+2bp).

Credit protection costs have been falling precipitously too. As if they are an indicator for sentiment across our markets – but they have been massively outperforming IG cash since the turn of the year. iTraxx Main declined another 2.9bp on Wednesday, to 82.9bp while X-Over fell 10.2bp to 335.4bp, the third double-digit decline in 3 days.

As for IG cash, well little really to write home about. There is a real reluctance to buy into this rally. That’s understandable. Still, we managed to finally have a session where we edged tighter and the IG cash index closed a basis point tighter at B+179.8bp.

Other high beta markets did better, much better. The AT1 market played into the improved tone reflected in equities, and helped the index move some 25bp tighter at B+682bp. It was a similar story in the high yield market, with the index 10bp tighter at B+516bp.

Have a good day.

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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.