29th November 2017

If you see a bandwagon

iTraxx Main

48.5bp, -0.5bp

iTraxx X-Over

230.2bp, -3.6bp

10 Yr Bund

0.39%, +4bp

iBoxx Corp IG

B+98.0bp, -0.8bp

iBoxx Corp HY

B+278.8bp, -4.5bp

10 Yr US T-Bond

2.38%, +4bp

FTSE 100 [wp_live_scraper id=”4″], [wp_live_scraper id=”5″] DAX [wp_live_scraper id=”12″], [wp_live_scraper id=”13″] S&P 500 [wp_live_scraper id=”10″], [wp_live_scraper id=”11″]

…It’s supposed to be too late…

Bitcoin is through the symbolic $10,000.. zooming well past $11,000 at one stage (gaining as much as 13.5% in the day – and we were rewriting the definition of a gimme trade, before being 2% lower, as at the time of writing), US tax reform breakthrough hopes, Brexit divorce costs seemingly agreed and we’re in very upbeat mood. Not even the latest, potentially far more reaching North Korean ballistic missile test is going to spoil this party (or burst this bubble).

As it appears right now, the markets look like they will endeavour to maintain the current momentum in prices through to year-end. Volumes, for example, in secondary credit, are not going to rise, few are going to sell corporate bond risk, primary is where the activity will reside and if equities stay or rise from current levels, then spreads are going to tighten some more. We previously suggested that the late October record tights were unachievable, but we might need to reassess that view.

The big news in the day was around a potential breakthrough on the Brexit talks. Bitcoin’s massive rally ran it close. Sterling shot higher as did Gilt yields, with the 10-year seeing 1.35% (+10bp). Other macro news flow was also positive, with regional inflation data in Germany showing a pick-up in November even as Spanish inflation was under-shooting expectations. Eurozone economic confidence hit its highest level since the turn of the millennium, according to a report by the European Commission. It does look mostly look very good on the global macro front (even the Chinese are trying to be responsible in slowing down the growth in domestic leverage), central banks are generally still very accommodative, the global financial system is awash with liquidity and risk assets valuations are exuberant into it.

As always, many are thinking about when to exit, rather than when to get involved. How much of the upside have we already had? Certainly President Trump is a wildcard, he retweets in Wednesday’s session were extremely provocative, to say the least for example. In credit, it is just about playing the market through primary and not chase secondary. The ECB and any other investor enquiry in secondary is going to be enough to promote a tightening in spreads, although the magnitude of any performance will depend more on where equities might be trading in any given session.

The day’s corporate deal flow was focused on higher beta credit, as if the going was so good that it was just perfect timing to get the more testy deals away (and almost en masse). We think that there is still a good two weeks of business to get done after this one ends, and judging by the number of mandates awarded and issuers on the road, we’re going to see just that.

The primary deals

The deal which may have commanded the most attention came from Telefonica as it took €1bn of hybrid debt. The perpNC5.5 sub-investment grade rated deal was finally priced to yield 2.625%, around 25bp lower than the initial guidance having garnered a book of €2.3bn. Adler Real Estate followed with a €300m issue in a 6-year maturity and a €500m tranche in a 4-year maturity yielding just 1.625% and both deals were priced well inside the initial guidance (tighter by almost 40bp on combined books of €2bn). Finland’s Stockmann Oyj went for €250m in a long 4-year priced at 4.75% (-50bp versus IPT). Late on, Telenet Finance issued an upsized €600m 10.25NC5 senior structure to yield 3.5%. In sterling, Pinewood Finco issued £250m in a 6NC2 structure yielding 3.75%.

Other deals came from Banco Commercial Portuguese which issued €300m in a 10NC5 Tier 2 effort to yield 4.5%, while the unrated Banca Farmafactoring lifted €200m in a June 2020 maturity floater at Euribor+145bp.Banco de Sabadell issued €1bn in a long 5-year at midswaps+73bp.

So the session was all about high yield with the day’s corporate bond activity coming from sub-investment grade (or implied) rated issues. And there are a number of deals likely to get priced in Thursday and Friday’s sessions. Demand for high yielding risk is resolute even after that quite severe pull back in spreads a couple of weeks ago – or because of the pull back! Either way, we had just over €2.6bn of non-banking high yield debt in the session, and the total for the year to date continues to rise deeper into record-breaking territory, now at a stunning €70bn.

There was nothing doing in primary in the investment grade market.

Crypto leads the way

A volatile cryptocurrency session led the way, with Bitcoin up 8% at the time of writing. US equity markets saw new records intraday before fading the rise, and ending the session quite mixed. In Europe, we have up much of the stellar earlier gains, the Dax for example closed 130 points off the session highs and was flat by the end of the day.

Rate markets sold off, and yields moved higher. Bad timing in some sense for total return players looking to get their month-end marks in at the close of business on Thursday. The sell-off will claw back performance and fixed income total returns across the range of asset classes will close in deficit for the month. So the 10-year Gilt benchmark ended yielding 1.34%, The 10-year Bund 0.39% (+4bp) and the US Treasury 2.38% (+4.5bp).

Credit had a decent day as judged by the synthetic indices which resulted in lower protection costs. iTraxx Main closed at 48.5bp while X-Over dropped 3.6bp to 230.2bp.

As for cash credit, we edged better in IG and that left the Market iBoxx IG index at B+98bp (-0.8bp) while the high yield index closed almost 5bp tighter at B+278bp.

Have a good day.

For the latest on corporate bonds from financial news sources, click here.

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.