14th September 2017

Looking for inspiration

iTraxx Main

51.1bp, -0.2bp

iTraxx X-Over

226.0bp, -0.2bp

10 Yr Bund

0.41%, unchanged

iBoxx Corp IG

B+109.2bp, -0.3bp

iBoxx Corp HY

B+291.5bp, -1bp

10 Yr US T-Bond

2.19%, unchanged

FTSE 100

7,294, -86


12,540, -13

S&P 500

2,496, -2.5

Record equities, the MPC and all that…

Thursday’s was another strange session. We really ought to be champing at the bit to get deals away, ratchet spreads tighter and be excited about what September and the final quarter might bring. The US markets overnight had, after all, seen the S&P, Dow and Nasdaq set new record highs. Also, the receding bid for safe-haven risk had seen US Treasuries give some back as yields, say the 10-year, rose to 2.19% having been at 2.06% a week or so ago. But European markets were having none of it. Certainly the equity markets were not buying into the US stock market rally.

That is, the dizzying heights reached in the US are not feeding through into any kind of euphoria here. That might be something to do with the strength of the euro currency which is likely going to crimp corporate profits of the big exporting corporates, even if some or much of that could be offset by the potential for a sustained recovery in the Eurozone.

The news flow in the session from a global perspective was light, although we did have much from the UK around Brexit and company-specific news of which most was negative. And then there was the Monetary Policy Committee meeting which threw up much for the UK rate markets.

Although the MPC voted 7-2 in favour of keeping rates on hold (at 0.25%), the wording of the statement attesting to the need possibly to reduce the stumbles over the ‘coming months’ had the FX markets all cock-a-hoop. The markets were pricing in a November rate rise and sterling jumped against the US dollar.

Gilts sold off some more and yields rose and, having already moved a significant amount in the prior sessions, the market gave up much more. In the immediate aftermath of the decision, the 10-year yield was back up at 1.22% (+8bp) while the front-end (as expected) saw 2-year yields up at 0.38% (+9bp) and the 5-year give up 10bp, to 0.65%. Ouch.

‘Bitty’ primary, but ‘yield’ is the word

€1bn deal for Bank of America

Credit markets were focused on primary and, although there were a lot of individual deals, we found that they were ‘bitty’ in nature. The IG sector had just a €750m offering from RCI Banque at midswaps+60bp in 5-years (and 15bp inside initial guidance), and the unrated Danish group DSV AS (likely implied X-Over) for €200m in a 7-year maturity at midswaps+135bp (also 15bp inside the initial talk).

The other deals in the corporate sector came from Banco BPM for €500m in a subordinated offering structured as a 10NC5 Tier 2 deal to yield 4.375%. We had Jyske Bank with a small €150m PNC10 AT1/CoCo deal with a 4.75% yield, followed by Banca Sella with a €100m 10NC5 Tier 2 transaction to yield 5.5%. In senior, it was Bank of America‘s turn with a €1bn 4NC3 floater, taking the monthly total to €4bn in senior supply.

Following those higher yielding financial deals, the high yield corporate sector came up with HKScan in a €135m offering in 5-years for a yield of 2.625% while MCS priced €270m in a 7NC3 senior secured note yielding 4.25%. So, the session was littered with deals, mostly smaller in size than we might have expected, but offered plenty of yield to a yield-hungry investor community. These are just the deals that are needed, even with much talk ongoing about central bank interest rate policy.

September has reached the halfway point and we are up at €6.3bn for HY issuance and €15.5bn for the IG non-financial market, of which €3.8bn and €7bn has come this week so far, respectively. As we have suggested in other comments this week and last, we are looking at up to €10bn of HY issuance this month and a €30bn handle for investment grade issuance.

Mixed feelings in uncertain markets

Earlier in Thursday’s session, there was a moderate increase in yields as safe-haven rate markets continued to feel the heat of the post-hurricane unwind. In the US, the 10-year Treasury was up to yield 2.21% (+2bp) while the Bund in the same maturity was yielding 0.42% (+1bp). The Treasury was unchanged to yield 2.19% as was the Bund to close yielding 0.41%. Noise.

As for equities, the FTSE reeled under the stronger sterling currency and was off around 1.2%, while other bourses across the Eurozone closed out in mixed fashion – up or down by 0.2%. Stocks in the US were playing out in mixed fashion as well, with the indices exhibiting small moves in the red or black.

The synthetic credit iTraxx indices were slightly better offered for choice – lower – in a hesitant session with Main at 51.1bp (-0.2bp) and X-Over at 226bp (-0.2bp as well).

In the cash market, we barely moved (tighter for choice, though) and the IG iBoxx index was left at B+109.2bp (-0.3bp). Similarly, the HY market was a touch better bid and the Markit iBoxx index fell to B+291.5bp (-1bp). We can expect – or not be surprised – if a deal or two is priced in Friday’s session.

We will be back next week. 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.