25th March 2019

Let’s hang on to what we’ve got

iTraxx Main

69bp, -1bp

iTraxx X-Over

281.8bp, -1.8bp

🇩🇪 10 Yr Bund

-0.02%, unchanged

iBoxx Corp IG

B+141.5bp, +1.5bp

iBoxx Corp HY

B+446.6bp, +3.5bp

🇺🇸 10 Yr US T-Bond

2.40%, -5bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”24″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

Why worry…

We’re going to close the quarter with fixed income market performance firmly in the black and ahead of anyone’s expectations. Eurozone rate market returns (iBoxx) are up a massive 2.2% so far and they’re going to hang on to those levels once we close out the quarter, come the end of the week. Fear, loathing, Brexit, recession and geopolitics are all neatly lined up to make sure that it will be the case.

We’re not sure about equities because daily swings of 1-3% are not uncommon when the news flow becomes more strained. In credit, primary will possibly take a breather but it’s been an excellent 3 months for it, so we have time to absorb the €80bn of IG non-financial deal flow. Secondary might possibly give up some ground, but we’re not going to worry too much. After all, for the year to date, euro-denominated IG credit has bagged total returns at an incredible 3% and the HY market some 4.8%.

There was a sense of calm transcend over the markets in the week’s opening session, despite Asian markets dropping hard overnight, but that was their catch-up phase from last week. It was helped in no small part from a better than expected German Ifo survey which suggested that business sentiment in the country has surprisingly improved in March. It helped the DAX perk up a bit but it didn’t last long, and the index traded for most of the session the red. Bunds were able to recover as well initially, pushing the yield on the 10-year back to around 0.00% (!) – before eventually succumbing and giving the small gains back. The euro currency was barely managing to cling on to some moderate upside.

Volkswagen wasted little time in getting a deal on the board. And they went for a 3-tranche euro-denominated offering with the ‘VW group’ previously in the market this year, in mid-Feb (€500m, short-dated floater) which followed a 4-tranche offering in late January (for €2.5bn). The group is usually up there as one of the top 5 borrowers in the market. Nasdaq was the other IG non-financial transaction in the session.

We’ve had the shock and awe that comes with the fear of an economic recession and we’re likely going to be on the end of a few more sessions like last Friday’s. The more reflective session seen on Monday is always going to hook a few into the markets looking at the sell-off as an opportunity which ought to see a better bid for higher-yielding risk that might have sold off more. All roads in that sense lead to the AT1 sector and to a lesser extent the high yield market as the ‘yield buyers’ look to add to positioning for higher beta risk.

Primary deals edge towards €80bn

The demand for corporate bond primary risk remains undimmed by the recent events which have seen significant weakness across the equity markets. In the week’s opening session, Nasdaq Inc was the first to print with an increased €600m offering in a 10-year maturity priced at midswaps+130bp and lopped the now customary 25bp off the initial guidance, helped by a book up at €2.8bn.

Volkswagen managed to solicit orders of a little over €6bn for the three-part €2.75bn deal. The tranches came in the form of €1.1bn in a 3-year maturity at midswaps+85bp, €1bn in a 5.5-year at midswaps+150bp and €650m at midswaps+190bp in an 8.5-year maturity.

There was nothing in HY or covered bonds and SSA deals were also absent (rarely). Van Lanschots printed €100m in a PNC5 AT1 offering costing 6.75%.

The total IG non-financial issuance now moves on to €79.3bn, with €25.5bn of that this month versus €27bn in each of January and February. We’re basically a deal, maybe two, away from beating those previous two months’ issuance.

Game theory at its best

The EU continued to play hardball, going in for the kill so to say, as they published leaflets suggesting that crashing out with a no deal (most likely, according to them) would see border queues, increased border checks, mobile phone roaming charges and pet passports. They’re trying to grind the UK down in the hope they get the current (in our view atrocious) Withdrawal Deal through. There will be no meaningful vote this week.

On the uncertainty around Brexit, we had Gilts better bid and the yield on the benchmark 10-year drop through 1.00% to 0.98% (-3bp). Bund yields dropped a touch late in the session to -0.03% for the 10-year, while the Treasury became increasingly better bid and yielding 2.40% (-5bp).  European equities ended slightly in the red and US stocks losses were choppy, down by up to 0.3% at the time of writing. There seemed to be no discernible market reaction to the ‘outcome’ of the Mueller inquiry, with the jitters coming on renewed growth concerns. What else?

So it looks as if we could be in for a weak session for risk assets given that more difficult performance in the US after the close in Europe.

In the synthetic credit market, we were slightly better offered (lower) and that left Main S31 at 69bp (-1bp) and X-Over at 281.8bp (-1.8bp) – again, in a rather uneventful session. That might change on Tuesday.

In cash, what we didn’t give up on Friday, we did in Monday’s session and the weakness saw to it that spreads, as measured by the iBoxx index, were wider at B+141.50bp (+1.5bp). The CoCo index closed 13bp higher at B+613bp. Small moves. As for the high yield sector, flows were their usual limited self, but we were always going a touch wider as the Street took on a nervous and defensive stance, leaving the HY index at B+446.6bp (+3.5bp).

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.