4th June 2019

How long’s that piece of string?

iTraxx Main

66.5bp, -4bp

iTraxx X-Over

291.8bp, -16bp

🇩🇪 10 Yr Bund

-0.21%, -1bp

iBoxx Corp IG

B+143.6bp, -1.3bp

iBoxx Corp HY

B+467bp, -5bp

🇺🇸 10 Yr US T-Bond

2.13%, +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″]

It’s different this time, really it is…

Deals! And plenty of them, serving as a useful distraction from the US/China trade war, Trump’s trip to the UK, whether or not the Fed is on the brink of a rate cut and what Draghi might have left in his depleted toolkit when he delivers Thursday’s ECB press conference.

Nothing fell out of bed in the session, markets felt tentative even if equities rose, but that was enough in terms of relative stability to allow credit primary to offer only its second day of activity in IG non-financial in almost two weeks. Not that the slowing deal flow has helped, with spreads wider on the vast majority of the deals in the market since the beginning of May.

Back to the macro angst. There was another poke in the eye for the Eurozone’s policymakers as the block’s inflation rate in May dropped to 1.2%, from 1.7% in April while the core rate dropped to 0.8% from 1.3%, respectively.

There’s little good in macro at the moment. Crunching lower market rates are heaping pressure on the banking sector’s profitability, leaving their specific equity valuations strained, but their equity-like fixed income products holding relatively well. The AT1 market has felt a decent amount pressure of late, but is still holding up returning 6.2% year to date (iBoxx index, spreads -100bp in 2019).

Of course, lower rates and potential further policy easing provide a boost to equities elsewhere but the boost can’t, rather won’t, last. It will all come crashing down, but we’ve been waiting for that eventuality for many years. One could argue that it’s different this time – but it was last time, as well. Central banks won’t stand idly by.

Investors have little choice but to go with the flow. In credit, the corporate bond market provides a declining pick-up versus the risk-free rate such that investors are comforted by the low default rate and limited rating transmission risk. Importantly, we get our money back at maturity in most cases while clipping a small coupon in the process.

There’s some head scratching going on. Credit spreads are widening on the back of the macro/equity market volatility and new issues are generally breaking wider versus reoffer. But it hasn’t stopped investors piling into some issues. The latest saw almost €7bn of orders for Vivendi’s €2.1bn deal and Euronext’s €500m issue saw investors put in for almost €3.5bn for it.

Too much cash, not enough primary corporate bonds.

Primary feeds the fish

Vivendi was first out of the blocks and was the latest corporate to chip in with a 3-tranche deal for a combined €2.1bn split equally between the tranches. The 3-year deal came at midswaps+35bp, the 6-year at midswaps+67bp and the 9.5-year tranche at midswaps+98bp – priced 22bp – 25bp inside reoffer. Euronext’s €500m 10-year offering was priced at 92bp, and the interest in the transaction allowed the borrower to lop 23bp off the initial guidance.

ESB Finance DAC’s 11-year offering for €500m attracted a €4.1bn book and final pricing of €+83bp was 27bp inside the initial talk. Next up was Easyjet with €500m of its own, in a 6-year priced at midswaps+118bp which was 17bp inside the opening guidance with the airline attracting €1.65bn of orders.

We rounded off with a dual currency/tranche transaction from Unilever. The euro-denominated tranche for €650m printed at midswaps+73bp (-12bp versus IPT) and the £500m 7-year offering priced at G+88bp (-12bp versus IPT). The books came in at €1.1bn and £1bn, respectively.

In all, we had seven tranches for a combined €4.25bn to open the account for the month in IG non-financial issuance, and we might anticipate another decent session on Wednesday ahead of the ECB press conference due on Thursday.

It didn’t end there. Mizuho came in for €750m in a 5-year at midswaps+63bp to add to the senior market issuance.

Fed saves the day!

We’re seeing some divergence in rate and equity markets, the former more fearful of and positioning for recession and policy action. The latter is feeding off the potential for lower policy rates (and market rates for that matter) but we think might be forced to reassess valuations soon. There’s little reason to be bullish on growth and on earnings for that matter.

With that in mind, the day’s economic data was dire, and was basically a continuation of the recent theme. South Africa’s economy contracted at an annual rate of 3.2% during Q1 2019. That Eurozone inflation data, as mentioned earlier, is flashing warning lights. The UK’s construction PMI showed that activity shrank in May as it came in at 48.6, from 50.5 in April.

Staying with the UK, retail sales dropped by 2.7% in May, the worst since the British Retail Consortium started recording them. And in line with other factory sector reports this week, Ireland’s was in no mood to buck the trend, as it also grew at its slowest level in 3 years.

A rebound in Tech at the start in the US pushed markets there as they rose by up to 2.5%, as at the time of writing, but they were helped by the Fed’s Powell’s supportive comments that policy (Fed act on rates) could be adjusted in order to “sustain the expansion” as the central bank monitors the impact of the trade war.

The Dax powered ahead, way out in front and led by autos as European equities elsewhere moved higher in a more laboured fashion. The index added almost 1.6% and almost twice that of other indices.

That bullishness was eventually reflected across rate markets, to varying degrees – as they gave up some of their previous gains. The 10-year Treasury yield moved higher to 2.12% (+4bp) and the Gilt yield in the 10-year closed up at 0.90% (+4bp). Bunds remained unmoved by it all though, closing to yield  -0.21% (-1bp).

Credit index moved much more decisively, helped by the improved tone in equities. So iTraxx Main moved lower, to 66.5bp (-5bp) while X-Over shot lower by 16bp to 291.8bp (-16bp).

And so, on to cash. Primary obviously dominated amid that welter of IG non-financial corporate bond issuance, but into the improved tone, the Street was tightening up the market. At the close, the iBoxx IG index was a touch tighter at B+143.6bp (-1.3bp) and the HY index at B+467bp (-5bp).

We will be back on Friday. Have a good day.

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.