30th November 2017

It’s all kicking off

iTraxx Main

48.0bp, -0.5bp

iTraxx X-Over

230.8bp, +0.5bp

10 Yr Bund

0.37%, -2bp

iBoxx Corp IG

B+98.1bp, +0.2bp

iBoxx Corp HY

B+281.5bp, +2.7bp

10 Yr US T-Bond

2.43%, +5bp

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″]

Everywhere else, that is…

The excitement has mainly been focused on equities and tech stocks, cryptocurrencies and Brexit politics. Fixed income has been dull in comparison. That’s probably how it should be given the nature and structure of the asset class. It’s a coupon clipping game and principal returned at maturity for reinvestment. Except that, in November, running performance has been negative.

Given the perceived lofty valuations everywhere though and the higher levels of volatility observed, it doesn’t seem to have impacted the fixed income space too much, save for the mini sell-off in credit at the beginning of the month. It certainly didn’t affect demand for corporate bonds, as evidenced by the tremendous receptivity for and volume of new deals.

Rate markets have played out rangebound for most of November. Even the sharp sell-off in Gilts has only taken the 10-year yield to where is was at the beginning of the month (1.36%) – and the same for Bunds (0.38%). IG credit is sitting on total return losses of 0.2% for the month and HY has lost 0.27%, the former coming on the back of the rise in intermediate maturity (5-year area) rates as spreads are unchanged in IG, while for high yield index spreads are 20bp wider.

The spread weakness mainly impacted the high beta sectors as we recoiled off record lows for those sectors (high yield, CoCos, corporate hybrids). Investment grade’s weakness in spread terms was much more limited. IG is a lower beta asset class, liquidity is poor and few real sellers emerge as recovering a position is impossible – or at least would be very expensive. We effectively got to record tights (Market iBoxx) in IG, only falling short by a basis point but the widening was very small by comparison and we are now back to flat for the month as we close it out.

Credit investors focus though has been on primary. November was a very good month for issuance in all markets. Records were broken in high yield through October, but November took the monthly tally higher (see later) into record territory by a massive margin and we expect the next two weeks to be littered with deals before the market comes to an effective close.

IG issuance has also come in at the upper end of expectations while we’ve had several senior and subordinated financial deals which have been well-received. The more juice on offer the better, with the investing pattern of the demand suggesting that few are concerned that higher rates are going to be an issue. They likely won’t be through the first half of next year, but lower asset purchases by the ECB might start to see that change into the second half of 2018.

Primary busy to the end

Deutsche Telekom in a €750m deal

While the penultimate session of the month was completely dominated by deals from sub-investment grade rated entities, Thursday final session had a wider range of issuers in the market. In an overall fairly busy session for the market, IG non-financial issuance came from Deutsche Telekom which issued €750m in a 7-year maturity at midswaps+25bp (-10bp versus IPT) off a €1.2bn book. Ferrovie Dello Stato Italiane was in for €600m in a 6-year green issue priced midswaps+52bp, just 8bp inside the opening guidance. We close the month on €30.9bn of issuance, which takes us to €258.7bn for the year to date.

In the high yield market we were met with Ceramtec‘s €406m 8NC3 deal priced at 5.25%, as well as Thomas Cook‘s €400m 5.5NC2 offering which priced at 3.875%. Energo-Pro priced €370m of a 5NC3 structure to yield 4%. Here, we close a superb month of issuance at €9.4bn and an awesome €71.2bn for the full year – and plenty more deals to come, we are sure.

Staying with euro-denominated issuance, we had Deutsche Bank lift €1.25bn in 3-year floater funding at Euribor+35bp. The month finally delivered €12.6bn and took the total for the 11 months of 2017 to €135.8bn.

Rounding off in sterling, a busy day here saw Bunzl Plc print £300m in 7.5 year funding at G+125bp and Tritax Big Box REIT Plc took a combined £500m in two equally split tranches in 9-year and 14-year maturities, off a £2bn subscribed book. Finally, Anglian Water Osprey is due with a £240m long 8-year which is likely to be priced on Friday.

US markets still setting records

Fresh record highs were being set in the S&P and Dow indices (the latter opening through and rocketing past 24,000 for the first time), while we eventually a bit of a fightback from the Nasdaq following the previous day’s tech related sell-off. The US Senate was due to vote tax reform proposals and this had the markets in a tizzy, and looking as to the bright side of what might emerge – especially as news emerged that Senator John McCain’s vote was secured.

More Brexit deal hopes had sterling rally some more, up at $1.35% (+1%) although this did put a dampener on UK equities with the FTSE off by 0.6%. The Dax also succumbed late on, giving up some good early gains to close in the red.

Rate markets traded a calmer session. The 10-year Gilt benchmark yield edged a touch lower to 1.33% (-1bp) as did the equivalent Bund yield, to 0.37% (-2bp). The periphery had a better session, BTPs were yielding 1.75% (-4.5bp) and Bonds 1.46% (-3.5bp). US Treasuries were a touch softer, before the weakness accelerated into the hopes of the Senate passing the tax reform bill, and the yield rose five basis points higher at 2.43% on the 10-year.

The direction of the iTraxx indices was mixed, with Main 0.5bp lower at 48.0bp and X-Over barely moved, just 0.5bp higher at 230.8bp. Some month-end effects were likely at play as positions might have been closed out and we read little into the day’s index moves.

As for the cash credit market, secondary was quiet and unimpressed with what was happening in US markets. The investment grade sector closed unchanged with the cash iBoxx index left at B+98bp while we saw a few basis point of index widening in high yield, the index left at B+281.5bp (+2.7bp).

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.