17th October 2018

Limping towards the finishing line

iTraxx Main

73.2bp, +0.7bp

iTraxx X-Over

292bp, +2.6bp

🇩🇪 10 Yr Bund

0.46%, -3bp

iBoxx Corp IG

B+134.6bp, unchanged 

iBoxx Corp HY

B+406.3bp, +2.5bp

🇺🇸 10 Yr US T-Bond

3.16%, unchanged

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”18″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”20″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”22″]

Suckers rally….

We’re limping towards the finishing line. The end of the year is in sight, but a market beset with worries which could come from a cacophony of situations is now looking weary. We might have had 2%+ gains in US stocks on Tuesday, but we were in little mood to take on the baton presented by it, and failed to move higher some more in Europe on Wednesday. Few are going to be sucked in by tech-led US stock rallies. We can’t even point to cautious optimism to help us in these final few weeks of the year.

The EU summit on Wednesday was always going to act to curtail activity given the stance taken by both parties ahead of it. Yet another deadline will pass without any breakthrough regarding a solution to the Irish border situation. There was a surprising drop in UK inflation as CPI in September fell to 2.4% from 2.7% in August year on year. Retail prices also declined. Food prices were the culprit. Sterling declined as a result and Gilts were slightly better bid.

It leaves us hanging on to what we have, and in a year where fears that rate markets would finally cause the envisaged havoc kind of materialised. Those early forecasts for the year had yields up at 3.25% for the 10-year US Treasury and the most bearish of forecasts had the 10-year Bund yielding 1% or a little more. The sell-off came late, and the former is more or less there while the Bund yield is being held back by other external factors.

The trade war between the US/China and the skirmish between the US/Europe is promising to slow economic activity everywhere except in the US. Fiscal profligacy will come back to haunt the US, but that’s for another day. The US is isolated in some sense and can afford to be given the high levels self-sufficiency its large domestic economy enjoys. It’s swinging the bat.

So it leaves the European stocks all underwater by some margin for the year. October has frequently been the cruellest of months. The DAX is off 9.2% year to date, the FTSE by 8% while the S&P500 is up by over 5%. Gone are the days the latter would drag everything higher in its slipstream. Mind, rate markets aren’t being crushed in Europe. Returns for the Eurozone (Markit iBoxx) leave them down by just 1.2% while credit markets are losing between 0.3 – 0.8% in total return terms.

Shelves still looking empty

It’s as poor an October that we can recall for the primary market. We’re past the halfway point for the month and the levels of issuance are dire. A deal here or there per session won’t be cutting the mustard for investors. Much of the ‘excess’ portfolio cash levels might have been absorbed through that September deluge, but there is still money to put to work. The dearth of supply is a real poke in the eye for them. Just €6.7bn this month and €183bn for the year so far for IG non-financial corporate deals versus €18bn and almost €230bn, respectively, for the corresponding period in 2017 sums it up.

Every little helps in the corporate bond market: €750m for Tesco

The good news around Tesco‘s performance comeback after a relatively difficult four years for the UK’s largest retailer helped it gain a huge amount of interest for its foray into the bond market. It was the stand-out deal of the day.

As it happened, the borrower issued €750m in a 5-year maturity costing them midswaps+110bp which was 25bp inside the opening guidance but made possible because the demand was for over €4bn. The X-Over, 5B-rated credit falls into the high yield indices, but that will not have deterred anyone with the predominant buyer of this issue being IG funds.

It was the only non-financial deal in the session, taking the HY issuance to date for October to €2.8bn.

The other deals came from Zurich Insurance which borrowed €500m in a long 10-year priced at midswaps+55bp, and Caixabank printed €1bn in a 5-year senior non-proffered offering at midswaps+145bp (-15bp versus IPT). ProCredit Holding (comprising a collection of development-orientated commercial banks) became the latest to pull a deal, albeit a small one.

So – deals, but it felt like borrowers remain sidelined because of the earnings season induced black period for them, or just afraid or unwilling to move given the current market conditions.

Clueless means directionless

Rates were a touch better bid, leaving the Gilt yield for the 10-year at 1.58% (-3bp), the 10-year Bund yield lower at 0.46% (-3bp) and the US Treasury in the same maturity at 3.16%. BTP yields went north, the market deciding to head into the session better offered and the yield left at 3.55% (+9bp) at the close.

European equities did very little but were mostly languishing in the red and giving up some of the much-welcomed gains of the previous session. They were not helped by a US market which failed to gain any positive momentum, choppy and mixed at the time of the close in Europe. Stocks this side of the pond closed up to 0.5% lower with the FTSE flat and an outperformer.

In credit, the deal flow picked up in terms of SSA deals, but we were light elsewhere, as mentioned. The more cautious tone, though, made for the synthetic credit indices to trade with similar bias and protection costs rose a little. iTraxx Main closed at a little higher at 73.2bp (+0.7bp) and X-Over at 292bp (+2.6bp).

As for secondary cash, once again we lived through a very tedious, low flow/volume session – and the market closed unchanged, leaving the iBoxx IG cash index at B+134.6bp and the high yield market just a touch wider at B+406.3bp (+2.5bp).

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.