- by Suki Mann
|🇩🇪 10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY
|🇺🇸 10 Yr US T-Bond
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Credit primary needing to cut the mustard amid rate drama…
It looks like corporate bond market investors are becoming much more discerning on deals being offered in the primary market. We might be at a pivotal point for credit as a result. We wouldn’t quite suggest it’s ‘better late than never’, but the rapid rise in rates of late has seen benchmark interest rates at levels many predicted they would be, but come year-end. That pivotal moment means that while investors need to get money to put to work, they’re playing with a higher degree of safety.
That is, IG benchmark’s work if the ECB is a buyer (comfort and safety), if the borrower is a reasonably frequent visitor to the market, has an established curve – and is a name already covered.
‘Rarer’ names, sub-benchmark sized offerings, maybe issuers being too cute on pricing, corporates with material EM exposure, ‘troubled’ or ‘more difficult’ credit stories are possibly being left alone. German group Bilfinger (high yield) was pulled last week after going out with final terms, the borrower waiting for more stable market conditions – but became the fourth borrower inside a fortnight to postpone or cancel a deal. At least Playtech managed to price its high yield €530m on Friday.
So it would seem that a level of risk appetite has diminished for the moment. The bull credit market isn’t encompassing all-comers at whatever size and/or price. That rapid move higher in rates looks like it might just have curtailed the ability of some corporates to get deals away, tethered so to say to the bottom of the harbour. It might be that we are just spooked at the moment, and once we settle down (later this week?), we could be looking at it all very differently.
Enough in the non-farms to tip the balance
We would think that there was enough in the non-farms report at the end of last week to suggest that Goldilocks might be finding that all the porridge is too hot. The 134,000 job additions in September might have been well below the 185k expectations, but we had a 69k revision higher in August’s number – while the unemployment rate fell to 3.7% (more than expected) from 3.9% previously. Average hourly earnings rose 0.3% in line with expectations, or 2.8% year on year.
So the outlook for the US economy looks bright. Be it the massive fiscal stimulus or the repatriation of foreign earnings being invested domestically just as the trade tariff regime begins to bite abroad, the US economy is moving along at a decent clip. And timed perfectly for the midterms elections.
Yields in the US rose another 4bp on Friday, to move higher to 3.23% (10-year). Another rate rise is coming in December with perhaps three or four to follow next year no doubt. It’s looking painful for EM borrowers exposed to dollar debt servicing and/or funding. And those higher US yields are dragging others higher with it.
In fact, European bonds were somewhat playing catch up with the huge rise overnight on Thursday in US rate markets. The 10-year Gilt yield is now up at 1.73% (+7bp), the Bund yield at 0.58% (+4bp) and the 10-year BTP – for other reasons no doubt, rising to 3.44% (+11bp).
A slower rise in the US rate curve would not have been too much of a burden for equities. But the rapidity of the move is and has left investors cautious and nervous. So US equities had another session under some pressure, as the S&P lost 0.55% but it was a 1% lower during the session. European equities were obviously trading in line with it, and most bourses were off by 1% or more at the finish.
Credit where it is due
We might be seeing several deals being pulled that don’t quite fit or meet the requirements needed at the moment by investors. But the secondary market is holding relatively firm versus other asset classes, albeit with activity levels at low levels.
So credit where it is due, and spreads as measured by the iBoxx index in IG were 0.5bp tighter at B+129.9bp (-2bp in the week). However, we do have more than an eye on the rate markets and the large rate move last week takes us -0.3% in total returns for the opening week of the month.
High yield closed the session close to unchanged (B+381bp) and the shorter duration product is somewhat sheltered from the rate storm, showing returns of +0.1% in the opening week of October. The pulled high deals are not seemingly affecting secondary valuations.
Where the impact is being felt is in the synthetic market, as some will hedge against any potential for a broad cash sell-off, but even still the moves are moderate when set against the fallen equities, for example. iTraxx Main ended the week at 69.2bp (+1.2bp) and X-Over was 3.7bp at 280.2bp.
As for issuance, we closed out the week totally underwhelmed. And increasingly, the market looks like it was flattered with September’s deluge of deals. That €35bn+ of IG non-financial issuance is not going to be repeated anytime soon, it would seem. The upcoming earnings season is also going to curtail the ability of corporates to get deals away as blackout periods get in the way.
IG non-financials saw just three borrowers for €1.2bn, the high yield market had €780m from two borrowers but will be remembered for the pulled issues. Senior financials piped up with just €1bn from two banks. The whole of October last year for comparison saw €18bn, €13.6bn and €8bn issued, respectively. We’ve some work to do to get to those kind of levels over the next three weeks! That secondary market squeeze is on.
As for this week elsewhere, there is more on Brexit as EU leaders meet, we have the usual companies kicking off the US earnings season for the third quarter reporting period (JP Morgan, Wells, Citigroup etc) and there are some US inflation data to look forward to.
Have a good day.
For the latest on corporate bonds from financial news sources, click here.