20th February 2017

Krafty, but no deal

FTSE 100
7,230, +22
11,757, unchanged
S&P 500
2,351, +4
iTraxx Main
74bp, +1bp
iTraxx X-Over Index
298bp, +4bp
10 Yr Bund
0.30%, -5bp
iBoxx Corp IG
B+135.6bp, +1bp 
iBoxx Corp HY Index
B+375bp, +4bp
10 Yr US T-Bond
2.42%, -3bp

Kraft unnerves the market late on…

Blockbuster bid: Unilever stock got a boost

The key takeaways from the holiday-induced lull last week were that equities hit several fresh closing daily record highs – the S&P closed at record levels. Government bond yields trended lower, having threatened to shoot higher into Yellen’s hawkish but pragmatic testimony.

Credit spreads edged tighter amid a decent level of issuance albeit most of it courtesy of €4.25bn from Pemex. President Trump was his usual self…erratic.

US economic data is as sprightly as it could be, the Eurozone is also threatening some sustained pick-up in activity while UK growth might be hitting a brick wall as consumption growth as measured by retail sales fell for the second month in a row in January.

So Gilt yields ended the week on a downward trajectory on those weak retail sales figures (10-year at 1.21%, -4bp), which will also help sterling corporate bond returns push back into the black (+0.2% YTD). The same goes for euro-denominated corporate returns (+0.1% YTD) as underlying yields ended the week lower, while the high yield market is holding its own as total returns stay comfortably above 1% so far this year.

Other news was significant and took in Unilever which confirmed it had rejected a blockbuster £112bn bid from Kraft Heinz – but that didn’t stop its stock hitting a record high with Kraft Heinz likely to come back with a higher bid. Mind, where there is a M&A winner – there is usually follows a loser. Unilever’s 5-year CDS was up at 40bp (+15bp) while the recently issued 6 and 10-year deals widened a painful 40bp, before settling 20bp wider. We assume also that Unilever had no inkling of an approach when it issued €1.2bn of debt on February 8.

Some will point to M&A event-risk making a comeback, but one potential major transaction doesn’t herald a general trend. This deal, if it happens, is just bad luck for Unilever bond holders. What that deal might do now, though, is serve to check the crazy tightening trend we have seen when new deals have been priced. Tightening of circa 15-25bp might be adjusted now with investors wary of (and to use as an excuse) the potential for M&A event risk destroying any performance.

Late on Sunday, Kraft issued a statement that it had withdrawn its bid, so we guess we can see a recovery in asset prices in today’s session.

French politics are hotting up, with two left-wingers potentially teaming up, and immediately the 10-year Bund/OAT spread jumped to 75bp from around 68bp. We’re still not discounting 100bp or more here as the campaigns hot up through March and April.

Primary to make a comeback?

We can only hope.

There was €6.95bn of issuance last week, taking the total for the month to €10.5bn. With seven sessions to go before we close out the month – and notwithstanding today’s Presidents’ Day holiday in the US – we should be looking at a €15-20bn-like complex for IG issuance as we close out February.

High yield issuance sits at €2.15bn and a bulging, still growing pipeline ought to see a steady stream of deals for a while yet. Senior financials only saw one new deal from Iccrea Banca which added to a Deutsche Bank tap.

All bets are off as far as what we might expect for March in the IG market. Some will point to corporates getting funding in before the potential for the French elections to induce some volatility into markets. The earnings season blackout period notwithstanding will possibly prevent a few from getting deals in next month.

Others will wonder why corporates not in blackout have failed to get funding in through February, given the lack of competing supply and favourable pricing dynamics. The €35bn or so of issuance year-to-date is a paltry return given that conditions have been quite accommodative.

High yield pick of the rest

BoE Governor Mark Carney

Credit markets were a little weaker into the close last week. IG spreads ended the week a basis point tighter as measured by the iBoxx cash index (B+135.6bp), having given up a basis point in the final session of it. Returns, as suggested above, have just turned positive largely due to the rally in the underlying. Sterling markets ended the session unchanged on Friday and flattish for the week while the Gilt rally has also seen to it that returns YTD are just about in positive territory.

The high yield market also registered some spread weakness in Friday’s session, and the iBoxx index closed 4bp wider at B+375bp. That was still 4bp tighter for the week, but off the lows we closed out with in Thursday’s session of B+371bp. Returns are at their highest level of the year so far, at 1.35%!

On the indices, we shifted wider with iTraxx Main closing at 74bp (+1bp) and x-Over at 298bp (+4bp).

Next week sees out a fairly quiet one for the month with little on the data front and a winding down of the US earnings season. The BoE’s Mark Carney is up before the Treasury Select Committee and we get the chance to scrutinise the minutes of the last Fed meeting.

Have a good day.

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.