5th June 2018

Italy makes or breaks June

iTraxx Main

67.1bp, +2.1bp

iTraxx X-Over

293.4bp, +5.6bp

🇩🇪 10 Yr Bund

0.37%, -5bp

iBoxx Corp IG

B+127bp, +0.6bp

iBoxx Corp HY

B+376.8bp, +1.4bp

🇺🇸 10 Yr US T-Bond

2.91%, -2bp

🇬🇧 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″]

And sunnier climes are not impossible…

If the markets don’t fall out of bed this month, then it promises to be a busy period for credit. New issue mandates are being dished out aplenty, we have a good pipeline of borrowers looking to get some pre-summer funding in, and a good month in primary which doesn’t overheat will beget a sustained tightening in spreads.

New deals will likely perform given that they are coming cheaper than they otherwise might following the recent market pullback. Confidence will come off a decent stream of deals in primary as those deals perform on the break (at one stage in May, over 70% of new deals were wider than reoffer). That, more often than not, feeds into a more constructive tone in secondary. June could be good.

Spreads gapped wider in May, but the weakness was not reflective of a mass of bonds being traded. Plenty of high beta bank risk and peripheral paper was under pressure, though. The Street daren’t put a decent bid on anything into a potential Italian political (and subsequent fears of a financial) crisis. We were wider in almost every session last month. For May, it meant that the iBoxx IG cash index widened by almost 30bp which is ‘slump territory’, but there wasn’t quite the sense of panic amongst investors that such a high level of spread weakness like that ought to elicit.

But we’ve been snapping back and should the political risks not escalate, we must be looking at recovering a good proportion of last month’s spread widening. The leaders of the pack in May were the high beta sectors where, as an example the CoCo market was under fire on those banking sector fears. The index widened by 160bp but was already 75bp tighter than the high point of last week in the four sessions to Monday’s close. That was 62bp at the close on Tuesday. The illiquid secondary markets are working up a whippy response in secondary. Subordinated financials across the board followed the same pattern – sharply wider and then recovering over 50% as fears of a financial crisis across the Eurozone recede.

And the notion of weakness filtered into the high yield sector – even as a couple of borrowers managed to print deals! The iBoxx HY index widened as much as 90bp in May but also recovered to  just 50bp wider, the snapback coming in just the last few days. Some were looking to lift cheaper paper, but offered side liquidity is as bad as the bid side was on the way wider. So we’re snapping back and confidence is returning, along with a whole load of frustration as screen prices don’t reflect any semblance of underlying liquidity. ‘Twas ever thus.

So it’s not all over in any sense. It felt like it was, as the Italians and the Brussels elite fought their battles prior to an Italian government being finally being installed. Unfortunately, the saga has legs in it yet, and prime minister Conte’s speech in parliament about the country’s power to negotiate with Brussels put some renewed pressure on Italian debt markets on Tuesday. He didn’t pull back from the so-called populist measures the parties he represents were grandstanding on wanting to push through tax reforms and curb immigration.

The 10-year benchmark BTP yield rose 19bp to 2.75%, while the Bund was back in vogue, the yield on the 10-year declining 4bp to 0.38%. The yield on the 10-year US Treasury was 2bp lower at 2.91% even after a better than expected services ISM while Gilts were also better bid, the 10-year closing to yield 1.29% (-1bp).

Equities in Europe didn’t budge initially, the DAX adding 1% with most other bourses up to 0.5% higher. The Italian market was lower throughout and by 0.6% lower at that stage. The gains were faded into the close, leaving European stocks flat to slightly down, while Italian stocks closed over 1% lower.

Preparing for a flood of primary deals

As suggested already, borrowers are lining up deals and we had a busy session of it on Tuesday. The deal flow, though, was mainly SSA related (Slovakia €1.5bn, Basque Govt €500m, for example). The one non-financial corporate deal came from Carrefour, with the French retailer offering €500m in an effort priced at midswaps+70bp in a 5-year maturity, priced 20bp inside the initial guidance off a near €5bn book.

After Monday’s €2bn from VW Bank, we’re up at €2.5bn from IG non-financials in these opening few sessions. The likes of Bayer, which is readying a jumbo offering to help finance its Monsanto acquisition – hopefully mostly in euros, is going to boost this month’s tally considerably and go some way in absorbing some of that weighty level of sidelined cash.

JP Morgan took €1bn in a 11NC10 senior offering at midswaps+88bp, and opened the account for June for senior bank issuance.

Finnish group YIT printed a dual tranche €250m split between a 3NC1.5 (€100m/3.125%) and a 5NC2.5 (€150m/4.25%) structure, keeping the high yield market investor interest satiated somewhat.

Italy checks credit’s progress

The comments from Conte to the Italian parliament added some nervousness to the session and any chance of a brighter day soon was lost. As with the weakness eventually in stocks and the return of a bid for safe-haven government debt, the synthetic market also saw to it that the cost of protection would rise as a bid emerged. So the iTraxx indices moved higher, with Main 2.1bp up at 67.1bp and X-Over 5.6bp higher at 293.4bp.

Cash credit in IG was also a little more cautious in the session, the predominant weakness seen in financials and some higher beta names. But no panic. Lessons learned from last week? The iBoxx IG cash index though just edged higher, to B+127bp (+0.6bp) and the CoCo index was 12bp higher at B+479bp. The next move is going to depend on what is said in Italy, where politics there hold the key for so many areas of the corporate bond market. Finally, high yield also edged wider, by just 1.4bp to B+376.8bp.

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.