- by Suki Mann
|🇩🇪 10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY
|🇺🇸 10 Yr US T-Bond
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Get it in – while the going is good…
It appeared a slow day – for anyone who wasn’t involved in the corporate bond market. Because primary was churning out deals through a very busy session. Corporate treasury desks were taking advantage of what appears to be quieter week on the news flow/data front with the Fed/BoE/BoJ all expected to leave policy unchanged when they deliver their assessments on Wednesday and Thursday.
With the obstacles therefore cleared, borrowers are making hay while we have some sunshine. Fiserv (technology solutions provider to the financial services industry) became the latest to add a three-tranche euro-offering, as Alliander, Carlsberg and Renault all added in IG non-financials – and mostly in the 5-10 year part of the curve. That’s the nature of the beast, others will go longer if it fits.
They’re getting those deals in while the going is good. The calm before the storm, perhaps. Borrowing costs are at rock bottom levels, but they’re not going to head higher anytime soon. The main risk, we suspect, will come from elsewhere and the contagion impact from it might curtail the opportunity to get deals away.
Obviously, the US/China trade war continues to rumble, while Hong Kong’s ‘troubles’ come into view now, too. Italian budgetary issues and the stand-off with the EU is another reason to think that we might be heading for a summer, or autumn, of discontent. The macro outlook is going to worsen, we think, and policy action is coming – not just from the Fed.
There’s a reason, after all, that Eurozone government bond markets (iBoxx index) have returned 5% year to date. In any given year, fixed income rate investors would be delighted with positive returns, or perhaps as much as 1-2%.
We have the strange situation (?) where we have (or had) low growth for the best part of a decade, yet the default rate has barely popped above 2% in Europe. It’s no coincidence that credit has delivered 4.5% – 8% depending on the sub-asset class, as the need for yield has driven money towards corporate bonds (supported by the limited levels of event risk).
So we think that the corporate bond market will hold up. Returns are unlikely going to hit 8% in IG – using a crude, simple extrapolation from the 4.5% YTD, but if we can hang on to these levels, that will have been a good result for the year (CoCo index +8%, HY index +6% both YTD, total returns). If we do hit a more difficult third/final quarter, then spreads will not be seeing say B+110bp on the iBoxx index (B+136bp currently, off from a 2019 low of B+122bp but tighter versus the B+172bp at the beginning of the year).
Whole lotta dealin’ going on
Acquisition funding Fiserv was the deal of the session. The US borrower took €1.5bn split equally between 3 tranches and all were rocked 25bp inside the initial guidance. The 4-year deal printed at midswaps+70bp, the 8-year at midswaps+115bp and the 11-year at midswaps+135bp. The issuer also took £525m in a 6-year at G+170bp (-20bp versus IPT) and £525m in a 12-year at G+210bp (-20bp versus IPT). This was the 21st triple-tranche or more offering from a borrower in the euro-denominated market this year.
Renault issued €1bn in a 6-year deal priced at midswaps+145bp, which was just 15bp inside the opening guidance (paid up for size and event risk) and books came in at €2.1bn. Carlsberg took an increased €400m in a 10-year offering at midswaps+73bp. Books came in at €1.3bn and final pricing was 22bp inside the opening mumble.
The other two IG non-financial borrowers were Legrand which issued €400m in a 9-year transition at midswaps+57bp, which was 28bp inside the opening talk pff a €2.1bn book, followed by Alliander issuing €300m in a 13-year at midswaps+52bp (-18bp versus IPT, books €1.3bn).
In the high yield market, BayWa AG took 5-year funding for €500m at 3.125%.
In senior financials the line-up was Credit Agricole for €1bn in senior non-preferred debt at midswaps+70bp (-20bp versus IPT), BPCE lifted €1.25bn also in senior non-preferred format at midswaps+80bp (also 20bp inside IPT) and KBC tapped the 1.25% 2025 issue for €250m. Finally, Credit Suisse issued €1bn in an 8NC7 deal priced at midswaps+105bp (-25bp versus IPT).
The month has been very heavy already for deals. Senior financial issuance is now up at €15.5bn, high yield deals have totalled €3.1bn and the IG non-financial deal flow comes in at €22.9bn from 36 issues – and is on course for being the best June since 2014. €35bn is the target for that to materialise.
Aside from in primary credit, there was a drift in the markets elsewhere. And it looks as if we are set like this for the week into those central bank meetings and European holidays. European equities closed flat and those in the US were slightly in the black, as at the time of writing.
Rate markets didn’t fare much better. Gilts closed unchanged with the 10-year yield at 0.85% as the various Tory leadership hustings got under way (absent Boris Johnson). The Bund yield in the same maturity edged higher to -0.245% (+1.5bp) and the US Treasury yield was a basis point lower at 2.08%.
Credit index didn’t do too much in the session, with protection better offered (lower) generally. iTraxx Main closed at 60.5bp (-1.2bp) and X-Over at 274.2np (-1.9bp).
In the cash market, spreads edged tighter for choice, leaving the iBoxx index at B+135.8bp and we had similar situations across other sectors too. The CoCo market was likewise effectively unchanged in the session, as was the high yield market as the week got off to a steady start. The IG iBoxx index closed at B+450bp (-0.7bp).
Have a good day.