24th October 2018

In the trenches, again

MARKET CLOSE:
iTraxx Main

76.3bp, +0.5bp

iTraxx X-Over

301bp, +0.1bp

🇩🇪 10 Yr Bund

0.39%, -2bp

iBoxx Corp IG

B+141.1bp, +1.9bp

iBoxx Corp HY

B+426.8bp, +7bp

🇺🇸 10 Yr US T-Bond

3.12%, -5bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”18″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”20″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”22″]

Still no shining light…

Well, what a turn up for the books! My Money Bank was back with its previously postponed bond issue – deciding to bite the bullet and paying up this time for the privilege of a covered bond deal. More importantly, we had Proctor & Gamble and ENBW visit – the former with a three-tranche offering in what can only be described as opportunistic deals, ahead of the ECB meeting. We likely won’t get anything in primary during Thursday and must close to saying that’s almost about it for this month. Away from those deals, Eurozone macro highlighted a slowing in the economy as manufacturing falters and trade wars start to bite. The incoming data is now beginning to reflect on the recent crop of geopolitical and macro headwinds, setting us up for a defensive run into year-end, and ahead of what could be a very difficult 2019.

The European markets were playing out the midweek session treading water in the black – until the US opened deeply in negative territory (over 1% lower), and we reversed +0.7% gains into -0.7% losses (DAX index, for example). Why not? After all, assessing the multitude of event-risk situations that are continuing to brew, there is little reason to move higher in any consistent way.

So macro disappointed and the French manufacturing sector isn’t too far from heading into contraction territory as the manufacturing PMI fell to 51.2 versus expectations of 52.4 in October, and those for Germany declined to 52.7 versus the 54.8 expected. Auto manufacturing production was to blame with new emission rules disrupting production lines. A hard Brexit will have even greater and immediate consequences, while a global trade war will act as a drag on any hopes of a material recovery.

The Eurozone composite PMI also declined to 52.7 (53.9 expected). The data will give the ECB much food for thought into Thursday’s meeting where they are still expected to call time on the QE purchase programme. That is, effectively tightening policy just when a loosening might be a more appropriate response. Great timing, not!

The euro took a tumble (off 0.7%) as did sterling renewed Brexit concerns. There was a slightly better bid for government bonds and we saw the 10-year Bund yield slip below a yield of 0.40%. The DAX finally got a technical boost (weaker euro helping) but failed to manage to trade out an earlier relatively rare positive start.


Primary gives us something… to write about

Finally, we managed to get some IG non-financial deals away in primary after a six day absence (JC Decaux was the last deal). German utility ENBW priced €500m of a 15-year maturity green bond at midswaps+60bp, which was 20bp inside the initial guidance and off a book close to €2bn.

Procter & Gamble: €2.1bn deal

However, it was the Procter & Gamble offering which took the eye, as it issued a three-part €2.1bn deal. The issuer printed €800m in a 6-year at midswaps+17bp, €800m again in a 10-year at midswaps+27bp and €500m in a 20-year at midswaps+45bp. The combined books of around €5.5bn saw them reduce the final pricing by 17-20bp versus the initial talk.

And so it takes the IG non-financial deal flow for the month to €9.6bn and we will get that €10bn before we close out October after all. With nothing likely on Thursday (ECB meeting) we would now anticipate deals to come next week, should market volatility remain at low levels.

There was nothing in senior/subordinated financials and the high yield markets also drew a blank. The Republic of Tunisia issued €500m in a 5-year costing them 7%.


Another day in the doldrums

We’re probably blaming the weak equity backdrop specifically on earnings at the moment. They’re continuing to suggest that the upswing in the earnings cycle might have peaked. In Europe, STMicroelectronics missed while AMS and Atos warned on profits in the previous session. Texas Instruments in the US was the culprit from the US on Wednesday. There was little reason to be cheerful.

European bourses were all in the red to varying degrees and at the time of writing the US markets were up to 1.5% lower, although the Nasdaq was 2.5% in the red. The FTSE managed to close flat.

The bid for government bonds had the 10-year Bund yield at 0.39% (-2bp), the 5-year edged 2bp lower too to -0.19%, while the 2-year closed to yield -0.66% which was around the month’s low. The 10-year Gilt yield dropped to 1.45% (-2bp) on domestic political concerns and the pull of lower US Treasury yields, where the 10-year was 5bp lower at a yield of 3.12%.

Credit markets didn’t do too much in the day. In synthetics, iTraxx Main edged 0.5bp higher to 76.3bp while X-Over closed unchanged at 301bp. Cash was quiet too and marked wider for choice, but at least there was the deal flow to keep investors occupied.

Investors are not sure whether to dip in and add or try and reduce some risk; liquidity and/or prices on either make it very difficult to execute a trade.

The iBoxx IG cash index was almost 2bp wider at B+141.1bp which means we are now 10bp wider this month for this index but some better news for total return investors with returns in the black (just) as the underlying has rallied. In the high yield market, we also felt a little pressure with spreads 7bp wider and the index at B+428.6bp.

It’s the ECB up next.

Have a good day.


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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.