18th October 2018

Never, Never, Land

iTraxx Main

75bp, +1.8bp

iTraxx X-Over

296.4bp, +4.4bp

🇩🇪 10 Yr Bund

0.41%, -4bp

iBoxx Corp IG

B+135.6bp, +1bp

iBoxx Corp HY

B+409.1bp, +2.8bp

🇺🇸 10 Yr US T-Bond

3.17%, unchanged

🇬🇧 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″]

Credit markets in a slumber…

The first port of call in any session for all investors is usually the state of the equity markets. For credit specific investors the primary market follows. Both have been in dire straits for just about all of this month so far. In terms of activity, we’ve gone from writing-off the odd week in terms of activity to likely writing-off the month. It’s not been great, has it? Equities have had their backs to the wall for much of October with losses at 5.4% already for, say, the German DAX total return index. Credit spreads have widened only moderately (returns flat) signalling a relative outperformance, but the primary market hasn’t even moved out of first gear.

Alas, we come to that old chestnut, that the bond markets should be ‘boring’. Having been spoilt over the past decade or more with relative value trades, total returns of 3% – 12% and copious levels of liquidity with moderate levels volatility, we’re going cold Turkey. Admittedly, there remains still plenty of “noise” to keep the interest up, but investors are clearly becoming much more discerning on which corporate they are prepared to fund.

Some deals are just not cutting it, and the list is ever-growing. ProCredit Holding was this week’s victim of whatever the ‘market conditions’ might not be conducive to an unknown borrower getting something away, but others have included My Money Bank, Volksbank Wein and Van Lanschot – and generally all smaller deals.

It would appear that investors prefer larger deals as they give the perception of liquidity (more reasonable bid/offer), likely necessary as we reach a potentially more difficult period for markets. Larger deals (€500m+) are not necessarily liquid though. As always, it depends!

And in Thursday’s session, it was the turn of RCI Banque in the sterling market. Normally this deal would be a dead cert for getting done. Final spread for the offering was announced at G+250bp for the benchmark (€250m) deal, but then the deal was pulled. It brings our attention to the Southern Housing deal last week, where the borrower was forced to change the spread after final terms were announced. Interestingly enough, the leads for that deal were the same! Surely RCI were not victims of an investor community wanting to make a point, in a parochial sterling market?

Primary stuck in a rut

Credit primary threw up JC Decaux but for just €300m in a 2-year floater format at Euribor+27bp, the €900m book lopping 13bp off the final pricing versus the initial guidance. Somewhere to park up some cash, if nothing else. It was the sole non-government owned, IG non-financial borrower in the market. For the month so far, that’s 8 borrowers, 11 issues and just €7bn printed.

The high yield market came up with UGI International in for an increased €350m in a 7NC3 structure at 3.25%. The only other deal of note was from Indonesian state-owned Perusahaan Listrik Negara group, in the market for €250m at midswaps+235bp (-15bp versus IPT).

Overall, slim pickings continuing with the theme we have had this month so far.

Yet another weak session, of course

The big macro news item of the day was Brexit. It is clear that the UK government needs a politician with some business acumen in charge. That’s because the politics are all being won by the EU side, gaining concession after concession while giving nothing up in return. May has yet again come back with proverbial tail between her legs, chastised by the EU and probably agreeing to extending the withdrawal period while further negotiations ensue.

The political backdrop in the UK is only going to worsen/intensify the pressure on her. Markets will find good (staying in for longer/certainty for the time being) in that, while any of the political infighting should be containable from a market perspective. For instance, sterling corporate credit spreads have barely moved over the past few months – all the weakness coming earlier this year (as with euro-denominated markets), and we have had more issuance than we might have expected, although that RCI deal was pulled in the session.

Equities played out in the red – as we are becoming used to now – with the DAX off another 1.1%, with losses accelerating into the close. It came courtesy of US stocks which opened firmly in negative territory and were down by 1.3% as we closed in Europe – not helped by news that US Treasury Secretary Steve Mnuchin had withdrawn his attendance from the FII investment conference in Saudi Arabia, in response to the Khashoggi disappearance. The earlier concerns were about China (trade as well as those GDP figures out on Friday), as well as the Fed minutes from Wednesday raising concerns about the pace and extent of the rate hikes to come.

In rates, we had a late bid for safe havens leaving the 10-year Gilt yield lower at the close at 1.54% (-4bp), the US Treasury yield unchanged at 3.17% and the 10-year Bund yield lower at 0.41% (-4bp). Italy tapped several issues for another €3.88bn but it was the prospect of a budget standoff with the EU Commission that saw yields on 10-year BTPs rise to 3.73% (+18bp) and a 5-year high.

In synthetic credit, the indices similarly were on the defensive and iTraxx Main rose to 75bp (+1.8bp) with X-Over 4.4bp higher at 296.4bp.

As for cash, those pulled deals are weighing only very slightly on the market which has otherwise largely withdrawn into its shell. We’re going wider, dragged such as equities continue to decline. The Markit iBoxx IG cash index was thus a basis point wider at B+135.6bp while total returns for the month are now positive (!) on the back of the rally in the underlying.

The high yield market had the UGI deal to keep it a little occupied, while secondary was under pressure as equities took another heavy tumble. The index therefore was wider by just 2.8bp though at 409.1bp.

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.