8th September 2015

Labor Day respite over

FTSE 100
6,075 +32
10,109 +71
S&P 500
iTraxx Main
72.5bp, -2bp
iTraxx X-Over Index
335bp, -5bp
10 Yr Bund
iBoxx Corp IG
B+142.9bp, unch 
iBoxx Corp HY Index
B+467bp, unch
10 Yr US T-Bond

Heigh ho, it’s back to work we go… Happy Tuesday! Labor Day in the US yesterday saw to it that the market would make no more calls on US rates to aid the uncertainty and volatility that have plagued us recently. Few were going to get involved in taking a view on ‘what next?’. Equities were nevertheless lively early on, despite China’s equity drop overnight along with the small matter of nearly $100bn leaving its huge FX reserve coffers in August – mainly because Glencore was selling assets to reduce its debt load. The news was very credit-friendly, as it included suspending dividends in the package. Tesco added to the credit-friendly news flow, announcing the sale of its Korean business for £4bn. On the downside, German industrial production data for July was a little lower than expected. The rally steadied and we were closing the session off the highs, and credit markets followed suit with only moderate upside. Secondary just edged a little better. We saw some primary activity in covereds, unsecured financials and even in corporates. Just to keep us all ticking over nicely.

Spanish borrowers dominate primary… Telefonica kicked off with a 6-year, Eur1bn issue at midswaps+98bp, while Spanish utility Iberdrola chipped in with an 8-year, Eur500m deal at midswaps+100bp in 8-year funding. New issue premiums were cut significantly to 8bp and 5bp respectively. Iberdrola’s deal was 8x oversubscribed! The deal was up on the break, but the 2x oversubscribed Telefonica deal was a touch weaker versus reoffer. Iberdrola got it right for investors, although they both got their funding in. Bank of America graced us with a couple of unspectacular tranches to populate the unsecured senior financial space. Amid all the noise around US rates, China’s slowdown and potential for additional action from the ECB leaving equities in particular volatile, the follow-through into the corporate bond market has been fairly restrained. Our market has not panicked at all and spreads have edged just a touch wider in the first proper week of post-holiday trading, while the new issue market has been flying. This level of macro uncertainty and volatility ought to have seen less supply. Instead, the level of activity in primary has confounded the sceptics, me included. Furthermore, it has been taken down very well, with most issues trading up versus re-offer levels. This augers well for the corporate bond market in Europe overall. For instance, smaller deals likely from the likes of Camilla, DLR, Pentair, Swisscom and Achmea ought to sneak through without too much difficulty.

Secondary quiet… Glencore paper was up to 80bp better but had been battered over the past few months into the commodity sector’s generally poor performance. Tesco paper was up to 5bp better. Equities were higher by around 0.7%, helping to support other markets and we managed to edge a little better in credit. 10-year bund yields moved a couple of basis points lower to 0.66%. Oil prices fell though by around 3%. At the close of last week, the iBoxx index lost 3bp in IG so today’s albeit modest tightening was welcomed, the index at B+142.9bp. The weakness in corporate spreads when we get it stems from the Street’s more defensive marks rather than being driven by any significant selling by investors. At best, investors are sidelined into macro/equity-induced volatility, and are better buyers otherwise, hence the bid for all things new issue. After all, there is scant liquidity elsewhere in the corporate bond market. This has been the pattern for several years and will carry on being so for a while yet.

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.