13th January 2017

How the credit market is shielding itself

FTSE 100
7,292, +2
11,521, -125
S&P 500
2,270, -5
iTraxx Main
71bp, +1bp
iTraxx X-Over Index
294bp, +4bp
10 Yr Bund
iBoxx Corp IG
B+135.6bp, +0.5bp 
iBoxx Corp HY Index
B+392bp, +-3bp
10 Yr US T-Bond
2.36%, unchanged

There is a plenty of spurious news flying around at the moment, with every headline having the impact of introducing much volatility into markets with some asset classes reacting more than others.

The upside is that the credit market really is behaving differently from other asset classes, and we think that investors are aware of the specific vagaries of the market – leaving those involved to add risk through primary.


Donald Trump’s first press conference wasn’t meant to furnish the market with his economic plans – but for some reason, the market expected it. Equities came under fire and government bonds got a good bid behind them as some of the expectation of bond supply/inflation trades were reversed. Unicredit – one of the 30 or so significantly important financial institutions (SIFI) – was forced to deny that the ECB required it to raise more capital (in addition to existing plans).

Reports also suggested the potential for coupon non-payment on its AT1/CoCo instruments which saw prices for bonds fall up to 2 points before recovering. The group had announced €8.1bn in write-downs and later a €13bn capital raising plan was approved by shareholders. All good there, then.

That’s not all, though…

France’s annual inflation rate rose to a 2-year high at the end of 2016, while German growth accelerated to a multi-year of 1.9% in the same period. Eurozone industrial production numbers are also surging. So, not enough “economic policy” information from Trump, good data from the Eurozone but a reminder that the Italian banking system still has major issues.

Telecom Italia: €1bn in a 6.5-year deal

The primary corporate bond market continued to print deals apace. There are no worries here about President-elect Trump. And, surprisingly, a few from Italy where the news flow around Unicredit failed to dampen enthusiasm for non-financial Italian corporate bond risk. It did in Q4 last year when Monte dei Paschi was in the firing line.

So, Telecom Italia was first borrower of the day out of the blocks, followed by a dual tranche inaugural transaction for Snam spin-off and IG-rated borrower Italgas (€1.5bn). The telco giant is now also the first high yield rated borrower to enter the markets this year, but was followed by Jaguar Land Rover and Cellnex with €1.95bn of combined prints.

Admittedly, there isn’t an IG investor in Europe who wouldn’t be interested in the bonds in primary of Italy’s blue chip national telecoms champion. In sterling, we had a high yield deal from TalkTalk Telecom for £400m. WP Carey was the other investment grade borrower with a €500m deal – and the first IG non-financial one for this year.

Turning to the details of the deals, Telecom Italia printed €1bn in a 6.5-year deal and managed to lop 18bp off the initial guidance, as Jaguar issued €650m and Cellnex enjoyed a stunningly successful 10x covered €335m transaction. The high yield market has never really been closed this year but, as ever, high yield deals need market confidence to be assured before a syndicate dare put an offering on the screen. But they could have picked their moment at anytime this year, given the positive tone in credit towards all things primary.

Still, better late than never.

There are more positives…

As the HY market’s opening deal flow saw us get to just under €2bn, the IG non-financial supply total builds impressively too, now up at €14.8bn in the opening two weeks of 2017.

So, risk-off in equities, a safe-haven bid for government bonds, sterling on the up versus the US dollar and euro, only moderate weakness in secondary credit because there is little attention by investors on this market and a primary window still wide open for borrowers to get their funding in. There was some weakness also in the synthetic indices as they remain the favoured – and only – risk proxy in credit through which to take a directional view.

Market weakness as we close out week two

Small up and small down has been the equity markets dynamic this past week as several indices flirt with – or trade at around – historical highs. However, losses accelerated as yesterday’s session progressed. The DAX closed 1% lower while the FTSE was flat and US stock indices nursed some decent losses. Seen by many as a car crash opening press conference by Trump on Wednesday, there is probably going to be some apprehension in the air now until we see the whites of his economic policy’s eyes.

Investing in American jobs: Amazon

That said, the outlook is not necessarily bleak – domestically anyway, with Amazon being the latest to invest aggressively as it announced the creation of 100,000 US jobs over the next 18 months!

Auctions and the like this week have reset the government bond market but yields were generally heading lower. The 10-year Gilt yield closed at 1.30% (-5bp), the new 10-year Bund yield was at 0.31% (the difference in yield between the old and new around 8bp) and Treasury yields declined to 2.32% (-5bp) for the same maturity.

And finally, in the secondary corporate bond market, no surprises that we edged wider amid little flow and that volumes were light. There was no drama and spreads managed to edge a little wider with the Markit iBoxx IG corporate bond index up at B+136.6bp (+0.5bp) and is now a basis point wider over these opening two weeks.

Sterling markets moved the same way, giving up a basis point of the 5bp of gains it had made since the beginning of the year, the index left at B+148bp. To finish it off, the HY market in secondary was also a touch better offered and index spreads moved 3bp wider to B+392bp (but still 19bp tighter year to date).

Finally, and into the weakness around equities, the corporate bond market risk proxies – the iTraxx indices – also moved higher as the cost of protection edged up. Main was left at 71bp (+1bp) and X-Over at 294bp (+4bp).

Have a good day. Back on Monday.

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.