12th March 2019

May’s mess

iTraxx Main

60.8bp, -1.7bp

iTraxx X-Over

278bp, -6bp

🇩🇪 10 Yr Bund

0.05%, -1bp

iBoxx Corp IG

B+146.5bp, -1.75bp

iBoxx Corp HY

B+451.5bp, -7bp

🇺🇸 10 Yr US T-Bond

2.60%, -4bp

🇬🇧 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″]

Hold your nerve…

Well, that was what we would call a volatile session. It impacted FX, rates and equity markets with credit alone in the ascendancy. The greatest levels of volatility were in FX markets. We think that Unicredit played it smart with an AT1 print, on the screens just as the markets opened with a positive take on the Brexit proceedings. It didn’t last.

Offering an initial couple of 8% (obviously, final pricing was lower), the Italian banking giant managed to attract a massive order book. However, the early interpretation of the new Brexit legal agreement didn’t cut the mustard in that it failed to assuage the fears of Brexiteers fearful of being locked-in to the back stop in perpetuity. Rates managed to get some support, sterling lost all its earlier gains and some more, equities weakened while credit was never going to buck the trend, and ended a touch better offered for choice.

A €1bn deal from Italy’s largest bank

So, the session was hooked on Westminster but we had deals to contend with. Unicredit’s €1bn offering was the plum deal of the day. The final coupon came in at 7.5% (-50bp versus IPT) with books in excess of €5bn and the issue was trading up on the break.

With the underlying government bonds market bid up with the 10-year yield on the Bund at 0.05%  – and the iBoxx HY single-B index at 6.73%, there is a clear argument in favour of this higher yielding contingent convertible issue.

In the IG non-financial corporate market, Deutsche Telekom plumped for a 2-tranche €1.5bn deal. They took 7-year funding for €500m at midswaps+63bp (-22bp versus IPT) and 12-year money for €1bn at midswaps+105bp (-20bp versus IPT). This was the sole borrower in this category in the market on Tuesday. Staying with the IG market, but switching to financials, Danske Bank issued €500m in a 5-year senior non-preferred deal at midswaps+165bp (-20bp versus IPT).

And as rare as it seems at the moment, we had issuance from the high yield market. The previous deal was a week ago and came from Telefonica’s high yield rated hybrid offering. On Tuesday, it was Cemex that issued €400m in a 7NC3 senior secured deal at 3.125% followed up by Sappi Papier Holding’s €450m 7NC3 issue priced to yield 3.125%.

Credit, where it is due

Away from those deals, we had US consumer price inflation for February decline to 1.5% from 1.6% in January, to the slowest pace for 2.5 years. That gave US duration a bid and helped 10-year yields to decline to 2.60% (-4bp), while the earlier sell-off in European rate markets was also reversed. That was more to do with the emerging and ongoing news that the DUP and most ERG members were likely going to reject the latest Brexit deal. That left the 10-year Bund yield back lower at 0.05% (-1bp) with the equivalent Gilt at 1.15% which was two basis points lower.

The UK political scene is set for change. It could be about to be hit by a tsunami. We don’t discount a general election which, if called now, closes Parliament and assures the UK leaves without a deal. PM May staying on would be an absurdity. And that will be reflected in the various sterling risk markets – most likely in a positive way to start with given that a ‘no deal’ scenario would be voted off the table and perhaps result in a boost for sterling. Anyway, the defeat for the government by a majority of 149 was a blow. It gets very interesting now!

The FTSE ended a touch higher (weaker sterling helped) while the Dax was just in the red (-0.2%). US stocks were mixed as at the time of writing with the S&P holding out in the black and the Dow in the red.
Credit index was better offered (tighter). It didn’t buckle under the volatility elsewhere. Main closed at 60.8bp (-1.7bp) and X-Over was 6bp lower at 278bp.

The IG market closed better bid, with the index almost 2bp lower at B+146.5bp showing commendable resilience against volatility seen elsewhere. Even the CoCo market was holding firm, the index 12bp lower at B+589bp as the dash for yield in fixed income gave much support and sentiment was surely boosted by the high levels of interest in that Unicredit deal. Returns in the CoCo market (iBoxx index) increased to 5% YTD.

The high yield market was also better bid through the session, and the index closed at B+451.5bp (-7bp) with returns YTD at 4.3%.

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.