19th June 2018

It IS a big deal

iTraxx Main

68.7bp, +0.7bp

iTraxx X-Over

301.4bp, +2.5bp

🇩🇪 10 Yr Bund

0.36%, -4bp

iBoxx Corp IG

B+126.1bp, +1bp

iBoxx Corp HY

B+382.8bp, +5.8bp

🇺🇸 10 Yr US T-Bond

2.89%, -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=”15″], [wp_live_scraper id=”16″]

Tweetie pie is back…

The investor base in the euro-denominated corporate bond market would have been left massively deflated after Bayer decided to pull the trigger on $15bn of issuance in the US, and only €5bn here. We had the appetite and willingness to take down much more.

Even as most were fretting about an escalation in the US/China trade war, the chemical giant had no problem with getting its 4-tranche offering away. There’s always interest (over €22bn worth of it) for a good name (defensive and solid in this case), where the price is attractive for the quality on offer. The heightening Washington/Beijing tensions was a side issue for this well-flagged deal.

But the trade tensions are not a side issue for anyone else – they are the big deal. Trump is unlikely going to back down as he needs a ‘win’ for his domestic audience. The Chinese will retaliate unless they can find a way to save face which is unlikely judging by the current rhetoric. Emerging market borrowers exposed to dollar funding are going to feel the pinch – with possible defaults coming in a big way. And Draghi might not be so relaxed about the strength of the underlying economy come the next ECB meeting. Investment is bound to take a hit now, the global economy is more than likely not going to slow some, oil prices might have seen their peak for now, and Eurozone inflation should slow again.

US Treasury 2s/10s will likely flatten some more (demand for safe-havens and the long end is cheap) while rising import tariffs will stoke US domestic inflation. The Fed will feel justified in its tightening policy. If the flattening of the curve is a predictor of recession, then the US has one coming in 2019, even before the US economy has had a chance to overheat. We’re all going to feel the consequences of that, just as we are going get dragged into the trade war.

So while all the omens were good for credit following that ECB meeting last week, the corporate bond market is not going to escape the ire coming from any risk asset sell-off. Safe-havens will be in the ascendancy and we have seen the bid for them re-emerge pushing the 10-year Bund yield down to 0.36% (-4bp), for example.

Bayer gets away with it, will others?

Bayer got its €20bn+ of funding away in dollars and euros in a much-hyped and anticipated deal – and it was massively welcomed from a IG euro corporate debt market which of late has struggled to keep pace with the average levels of issuance of the past 5 years. The level of demand was extremely high and belied the view that we’re risk-off almost across the board as markets fret about the macro outlook. The bid is there for primary, with investors knowing that most transactions will need to come with higher premiums (than of late) and that they’re likely going to perform as a result.

The problem is, borrowers will be reluctant to print unless they are sure their deal will get away (with relative ease) and won’t be derailed by any event-risk. That is, almost any deal is a ‘Trump-tweet’ away from becoming the next one to ‘postpone due to adverse market conditions’.

We don’t necessarily subscribe to the view of a rush of issuance to come into the pre-summer break (even if there is a decent pipeline), because much will depend on the prevailing broad market sentiment. For instance, there was no other plain vanilla corporate bond issuance in what was an otherwise a very quiet session on Tuesday.

Anyway, Bayer garnered a book in excess of €22bn for the 4-tranche offering on Tuesday. They went for a 4-year floater priced at Euribor+55bp for €750m, priced 20bp inside the opening guidance. A €1bn, 4.5-year tranche was priced at midswaps+50bp and was also 20bp inside the initial guidance. They took 8-year funding for €1.75bn at midswaps+90bp (-15bp versus IPT) and finally launched at 11.5-year deal at midswaps+120bp for €1.5bn (-15bp versus the initial talk). A job easily done.

That’s €13.75bn of issuance for the month and €109bn year to date. But it’s 31% IG non-financial issuance less than the first six months of last year.

Risk off, of course

It was looking hopeful earlier in the month that June would deliver much of what May didn’t. But looking at the performance as things stand with just over a week’s worth of business to get done and we see that once again the DAX is in negative territory year-to-date, as was the Dow and the FTSE, while the S&P is still in black. For the session, the DAX lost as much as 1.6% at one stage before recovering to close 1.2% lower, and most other European bourses were up to 1% lower. We saw losses of 1% in the US.

In rates, the 10-year Treasury yield was down at 2.89% (-4bp). Gilts were all better bid with the 10-year yield at 1.27% (-5bp) with some of the demand for Gilts likely coming as the EU Withdrawal Bill showdown comes around, on Wednesday. BTPs seem to have found a new level, trading in a 2.50 – 2.60% range, closing to yield around 2.59% (+3bp).

Credit index offered a more measured response and Main was only 0.7bp higher at 68.7bp with X-Over 2.5bp higher to close out at 301.4bp, the bigger widening coming in Monday’s session.

In cash, the market was better offered for choice but the weakness was very limited – leaving the iBoxx IG cash index at B+126.1bp. The correlation between equities and high yield valuations was intact, though, the HY index 5.8bp wider at B+382.8bp.

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.