4th September 2018

Needing to ramp it up

iTraxx Main

67.9bp, -0.4bp

iTraxx X-Over

296.9bp, -1.8bp

🇩🇪 10 Yr Bund

0.36%, +2bp

iBoxx Corp IG

B+138.3bp, +0.5bp

iBoxx Corp HY

B+403bp, -0.5bp

🇺🇸 10 Yr US T-Bond

2.90%, +5bp

🇬🇧 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″]

Willing the markets on…

Our obsession with the primary market continues – because it is the oxygen of the market. Tuesday’s session saw a plethora of activity, but it was mainly financials driven. Covered bonds, senior issues and subordinated debt dominated the screens with a couple of peripheral non-financial corporates also in the mix. Spreads are edging wider, though, leaving benchmark performance to come under constant pressure, while total returns hover around zero for the year – but credit is outperforming in both IG and high yield versus equities and government bonds.

A little more pressure was heaped on Turkey as Fitch downgraded the outlook on sovereign’s debt rating and ensured that the beleaguered country stays in the headlines. The situation in Turkey seems to have calmed a bit, and while it might look like fuse has become more slow burning of late, we can expect some severe market ructions soon – very soon.

In the UK, latest PMIs showed that construction activity had slowed more than expected in August and no doubt Brexit uncertainties will be blamed. Hopes that the Italian government might exercise some budgetary restraint saw a bid emerge for BTPs, with the 10-year yield dropping to 3.05% (-14bp).

In all, we’re not off to the brightest of starts for the month. Equities had another weak session, rates were slightly better offered and credit spreads edged out again. Much might depend on how the US plays out over the month, but judging by the performance of US equities in August (excellent) versus how European stocks played out (poorly), there’s no guarantee that a positive US market will necessarily help to prop up the European markets.

With that in mind, in credit, we could do with a positive primary market with deals performing well on the break and helping to boost confidence in the market which in turn can lead to positive performance in secondaries. As a reminder, spreads in IG have widened by 13bp since the beginning of August and 42bp this year. That’s more than what anyone would have budgeted for. There have been a couple of hiccups along the way, but nothing to suggest we should be so much weaker in spread terms.

The final quarter or so can usually be a bullish period for the markets, and if that happens to be the case this year then we are probably looking at B+120bp – 125bp as an upside level for the IG iBoxx index (from B+138bp now). The sterling IG corporate bond index is completely unchanged since the beginning of August.

Similarly, the HY index widened by 21bp in August and 120bp this year to B+403bp. An upside scenario could see this closer to B+350bp. It might seem unlikely but it is not impossible.

Primary doing just enough

A €1bn deal for the Spanish multinational broadband and telecommunications provider

Telefonica opened the market in the session with €1bn issued in a 7-year at midswaps+95bp which was 20bp inside the opening mumble – but with order books at just €1.8bn. Italian gas distribution group 2i Rate Gas was next up with a €500m issue at a very cheaply priced midswaps+165bp, also off a smallish book of just €850m – and with pricing only tightened by 10bp versus the opening guidance.

Industrial investment group Investor AB took 12-year funding for €500m at midswaps+47bp managing to gain an order book of €1bn (priced -12bp versus IPT). State-owned China General Nuclear Power Corp was the day’s other non-financial issuer, in for €500m in a green bond in a 7-year maturity at midswaps+150bp.

So we have had a decent start to the month with €3.25bn in two trading sessions (not including CGNPC), of IG non-financial corporate supply – and €146bn in the year to date.

In financials, Rabobank took €1bn in a PerpNC7.25 AT1 issue priced at 4.625% (-37.5bp versus guidance) managing to elicit a €4bn book as the high-quality borrower offered a good yield pick-up. Alandsbanken issued €250m in a 3-year senior non-preferred at midswaps+55bp and so opened the account for senior borrowers in September. In sterling, Banco Santander lifted £500m in a 5-year maturity senior non-preferred at G+185bp.

Market still finding its feet

The DAX is becoming a big underperformer this year. It lost over 1% again in Tuesday’s session and is now close on 6.5% down this year (on a total return basis). The FTSE was off just over 0.5% while the US markets reopened after their long weekend break just up to 0.2% lower. The usual suspects were to blame. Trade tensions between the US/China and NAFTA uncertainties between the US and Canada.

It wasn’t as if that Fed through into the rates markets, where government bonds were better offered. In the UK, news of the slowdown in construction activity still saw moderate weakness in Gilts, the 10-year yield up at 1.42% (+1bp) while the same maturity Bund yield was up at 0.36% (+2bp) and the 10-year US Treasury yield rose to 2.90% (+5bp).

In the credit world, the synthetics didn’t move much but were slightly better offered (lower) leaving Main at 67.9bp (-0.4bp) and X-Over at 296.9bp (-1.8bp).

As for cash, there was obviously much attention on the day’s deal flow, and we barely moved much in cash. The IG index moved to B+138.3bp (+0.5bp) and the high yield index to B+403bp (-0.5bp). Basically, little happening and the moves all noise.

On a housekeeping note, I’m going on a holiday. If market volatility deems it necessary I’ll be publishing intermittently and back fully otherwise on Tuesday 18th September.

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.