21st October 2019

Never-ending Brexit drama

iTraxx Main

50.8bp, -1.6bp

iTraxx X-Over

225.8bp, -5.2bp

🇩🇪 10 Yr Bund

-0.35%, +4bp

iBoxx Corp IG

B+117.5bp, -0.5bp

iBoxx Corp HY

B+399bp (-4bp)

🇺🇸 10 Yr US T-Bond

1.78%, +3bp

🇬🇧 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″]

Give us a break…

It might have been a positive start to the week, but the Brexit-parliament shenanigans continue to hang over the market like the proverbial sword of Damocles. Once again, Parliament was denied a vote on the Brexit deal agreed between the UK and the EU. Nevertheless, even sterling assets held their ground, as the market probably still anticipates that PM Johnson will eventually get his deal through the House.

Sterling hovered just a few ticks below $1.30 (effectively unchanged in the session), Gilts were better offered (yields higher) and the FTSE underperformed (was flat) versus other sharply higher equity markets. We’d think that UK stocks will rally harder if a deal is passed. Credit markets were in good shape, spreads tighter and we added another €2.1bn in primary to the IG non-financial total, as this market heads for a record year.

The weakness in Gilts saw the 10-year yield rise to 0.74%, adding 3bp in the session and representing a good 30bp in the past month, ever since markets got a sense that a Brexit deal could be agreed – and voted through. There is more to go, but while we should pop through 0.80%, macro concerns will eventually take over and curtail rate weakness.

There has been an impact on the Bund as well. After a very strong bid for them for the best part of this year, there has been weakness of late, and moves are not entirely motivated by Brexit. The yield has risen by around 40bp off the record lows (-0.74%) residing now at -0.35%. The ECB’s purchase programme, weakness in the Eurozone economy (recession in Germany) and US/China trade tariff event-risk will limit the sell-off in Eurozone bonds.

Once again, while equities were in the ascendancy, we were otherwise in some kind of holding pattern, although given the time of the year, that’s to be expected. Especially as it has actually been a very good year for most asset classes and investors would be forgiven in pulling back on getting too involved.

Another €2bn+ in the bag

Well, we got another €2.1bn added to the IG non-financial total courtesy of cruise ship operator Carnival PLC and a three tranche effort from Pernod Ricard. We’re now up at €271bn for the year and just €14bn away from the record supply for any year. So €19.6bn of IG non-financial debt has been issued this month and, if markets can stay calm over the next week or so, we’re looking at a potential €30bn for October.

Carnival PLC issued €600m in an increased deal, in a 10-year maturity priced at misdwaps+98bp. Books totalled €1.3bn and final pricing was 17bp inside the initial guidance.

The real focus was the rarity from Pernod Ricard, though. After a three and a half year absence, the French group took €500m per tranche with a 4-year priced at misdwaps+32bp, an 8-year priced at midswaps+60bp and a 12-year costing midswaps+80bp. Final books for the transactions came in at a combined massive €10bn, and final pricings were 23-35bp tighter versus the initial guidance levels.

Elsewhere, the deal of note was Banco BPM’s €500m issue, the long 5-year senior preferred picked at midswaps+200bp which was 25bp inside the opening guidance off a €1.35bn book.

Markets moderately positive

And finally, the Bundesbank reported that the German economy may have entered recession in September. However, the good news – ‘good’ because we do need to clutch at straws, after all, was that the central bank acknowledged that the recession was one which didn’t come with the all-singing, all-dancing usual increases in under-utilised capacity, unemployment and so on. That, we think, might follow.

The Dax rose by almost 1%, the FTSE just 0.2% while the S&P was hanging on to 3,000 (up 0.6% at the European close).

In rates, the 10-year US Treasury yield rose to 1.78% (+3bp) and the Bund yield rose to -0.35% (+3bp).

In credit, we had another positive session. It was led in the first instance by the indices with protection costs declining, leaving Main at 50.8bp (-1.6bp) and X-Over 5.2bp lower at 225.8bp (at or close to contract lows).

The cash market was subdued, but that is to be expected for a Monday, or any day given markets are parched of liquidity. The Pernod Ricard deal was a welcome distraction, but still, the broad positive tone for risk has the Street tighten up secondary.

As a result, the iBoxx IG cash index had an excruciating squeeze, edging just 0.5bp tighter to 117.5bp – and the tightest level in 3-months. Higher beta credit helped the AT1 and high yield markets to outperform, the latter index at B+399bp (-4bp) – and the first sub-400bp level on the index since April.

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.