15th May 2018

Mixed macro outlook

MARKET CLOSE:
iTraxx Main

55.2bp, +0.9bp

iTraxx X-Over

270.7bp, +2.8bp

🇩🇪 10 Yr Bund

0.64%, +3bp

iBoxx Corp IG

B+105.5bp, -0.2bp

iBoxx Corp HY

B+322.1bp, -0.5bp

🇺🇸 10 Yr US T-Bond

3.10%, +10bp

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Playing into the hands of credit…

We had another flurry of deals as primary ramped up, this time covering most markets in IG credit, covered and SSA borrowers. The sluice gates are fully open. It’s taken a while, but we’re getting them at a fairly high rate and hoping that it can continue through this month and next before we inevitable summer lull kicks in. And we do have a fair amount of business to get done if we are going to get back into the ‘range’.

All that kept the credit market occupied, while on the macro front, German GDP for Q1 confirmed what we already knew about the sluggish economic environment. Eurozone industrial rose but missed expectations in March while the German Zew economic sentiment indicator remained largely unchanged in May – but at depressed levels.

The story for credit is that flurry again in primary. The story for everyone else is macro in the Eurozone. There is a slowdown and the ramping-up in economic activity through the second half of 2017 has proved to be a flash in the pan. Many will suggest that they expect a pick-up through Q3 and Q4, as Q2 is likely to remain sluggish given the recent data prints. A more reflective view suggests we should harbour much caution given the maverick-like, seat of the pants incoherent policy signals coming from the White House.

US/Chinese trade talks going well – or not, there’s some backtracking. We have the tearing up of the Iran nuclear deal and there’s uncertainty around the ramifications for European (and other) corporates still doing deals in that country as the US takes a hard-line stance (aka North Korea) and so on. All are going to test everyone. That’s why we have hesitation around rate markets and equities. That US Treasury curve is flattening, leaving most to deduce the classic signs of a recession in the offing come 2019, perhaps.

Inflation is hit-and-miss in the US and the 10-year has seemingly begrudgingly been heading higher. But after Tuesday’s retail sales data showing an increase in line with expectations of 0.3% in April – with March revised sharply higher, the 10-year yield shot higher, to 3.10% (+10bp). There is a disconnect now between what’s happening in the US and in Europe, with diverging policy implications. The Bund yield is being dragged higher though (0.64%), but it is difficult to envisage that we could see the recent highs again anytime soon (of around 0.80%).

That should play into the hands of the corporate bond markets. The ECB will need to sit it out with a more dovish tone than hawkish. The 2-year Bund yield is holding below -0.50% while the 5-year is around 0% (or lower). There is little chance of economic disaster in our view. However, the slowdown in economic activity when set against corporate balance sheet liquidity (defensive) and their improved ability to service their obligations (defensive) as they hoard cash at their lowest ever funding costs is suggestive of a renewal in a firmer bid for corporate debt.


Busy primary: Day 2

Sodexo issued the smallest deal in the session, just €300m in a 7-year at midswaps+45bp, final pricing 15bp inside the opening guidance off a 3x subscribed book. Wuerth added €500m also in a 7-year offering at midswaps+45bp and 15bp inside the guidance as well – and also off a 3x subscribed book.

Deals for BASF AG

US communications group American Tower became the latest reverse US borrower, as it also added €500m to the day’s deal supply, taking 8-year funding at a cost of midswaps+118bp. That final pricing was 17bp inside the initial talk, having managed to build a book of €1.4bn.

And then we had RCI Banque price €750m at midswaps+78bp for an 8-year maturity, which was 17bp inside the opening chatter. BASF AG was the final plain vanilla IG non-financial issue as the German chemical giant issued €750m in a 7-year at midswaps+20bp and €500m in a 12-year at midswaps+37bp, 13-15bp inside the opening guidance.

Enel SpA rounded off the non-financial deals with a dual tranche hybrid issue. They went for 60.5NC5.5 and 63.5NC8.5 structures priced at 2.625% and 3.5%, respectively, for a combined €1.25bn. The books were €1.3bn and €1.7bn, respectively.

So another €4.55bn in the session took the two-day total to €11.1bn of IG non-financial issuance – and to a shade under €15bn for the month so far, for IG non-financial issuance.

BNPP issued senior non-preferred debt, in the form of a €700m long 5-year and an €800m 5-year floater at midswaps+62bp and €+62bp, respectively. Finland’s OP Corporate Bank also issued in a dual tranche deal, taking €1bn split equally between a 3-year floater and a 7-year fixed offering.

The likes of the ESM, Deutsche PBB, FMS and ADB made up the covered and SSA deals flow.


Mixed bag elsewhere

On the macro side, German GDP for Q1 came in at 0.3% versus 0.6% in the previous quarter and below expectations of a rise of 0.4%. Eurozone GDP growth for the quarter dropped to 0.4% from 0.7% in Q4 2017. Eurozone industrial production also remained sluggish in March, at 0.5% versus expectations of 0.7% but much better than February’s massive 0.9% month-on-month decline.

The UK’s productivity also sharply contracted in the first quarter after a more solid H2 2017 highlighting how the whole of Europe has had a poor first quarter. And will likely have a weaker Q2 as well.

So with the 10-year US yield at around 3.10% and the highest level in over seven years, there was some pressure on European rate markets despite the aforementioned weakness. The 10-year Bund yield moved to 0.64% (+3bp) while the equivalent Gilt yield moved to 1.51% (+4bp) at the close. May could be a cruel month yet for performance for fixed income in total return terms.

The retail sales data from the US, suggesting an upbeat consumer allied with the move in rate markets put some pressure on equities. And we saw a rare (of late) reversal in the US with stocks off by around 1%. European stocks closed flattish helped by some marginal currency weakness versus the dollar.

In credit, the synthetic market backed up a little too, with iTraxx Main higher at 55.2bp (+0.9bp) and X-Over closing at 270.7bp (+2.8bp). The cash markets were doing very little and closed unchanged with the IG iBoxx index at B+105.5bp (-0.2bp) and the high yield index at B+322.1bp (-0.5bp).

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.