11th January 2017

No indigestion

FTSE 100
7,274, +36
11,583, +19
S&P 500
2,269, unchanged
iTraxx Main
69bp, unchanged
iTraxx X-Over Index
290bp, unchanged
10 Yr Bund
0.28%, +1bp
iBoxx Corp IG
B+135bp, +0.25bp 
iBoxx Corp HY Index
B+389bp, +1bp
10 Yr US T-Bond
2.38%, +1bp

It will come, soon enough…

The Emperor’s new clothes moment, that is…but not yet. We’re in full swing and few want the party to end, even if primary is spewing out deals where the initial price guidance is being brushed aside as some nuisance level. It’s barely a guide!

We’ve had deals in these opening few session of the new year where pricing has been tightened by an average of 15-20bp, and on Monday one of them by 25bp. There has been little or no follow-through in performance in primary – as if investors are happy to get their fill, be invested, and move on to the next deal. They will worry about performance at some other time.

For pricing to change, we usually follow one of two paths. The most obvious one will be an external event which sees the corporate bond market get caught up in the resulting risk-off trade and primary shuts. It later re-opens with deals priced a little more sensibly (tightened more cautiously) just to get the “feelers” out, before investor and syndicate confidence allow us more aggressive pricing strategies.

The second centres on how much issuance we need, how much weak secondary market performance will we take before we start to think enough is enough? Unfortunately, such is the fragmentation of the euro-denominated corporate bond market by investor and geography, it leaves this dynamic as an influence in pricing as more open-ended.

We need that external event to derail the market.

There were two deals for the Spanish multinational broadband and telco provider

Deals galore

The corporate bond market was again laced with deals. Busy, busy, busy. Telefonica worked an 8-year for €1.25bn and a short 11-year for €500m, priced 15bp inside the initial price guidance for the 8-year and just 5bp inside for the longer deal. Imerys took an increased €600m in 10-year funding (-18bp vs IPT) and Eni’s €750m 10-year offering was priced 7bp tighter versus the opening guidance.

The daily total of non-financial IG debt came in at €2.6bn, and the total for this great start to 2017 takes us into double-digit billion figures for the month to €10.9bn. BPCE became the latest French bank with a senior non-preferred €1bn deal with Mediobanca (€750m) and Santander (€1.25bn) also issuing senior transactions. Dutch insurance and investment giant NN Group came with senior (€500m) and subordinated (€850m) deals.

As we commented previously, there is a hefty pipeline. So long as rate markets hold steady, equities play out as they are – in a tight range or higher – and macro risks from a political perspective don’t spoil the mood, then we’re looking for more of the same this week and into the big inauguration-event next week.

The rest seemed inconsequential

Equities apart from the FTSE spent much of the session in the red, before a late flurry helped push them into the black. As for government bonds, it was a similar story with yields rising a basis point or so within the confines of a fairly unremarkable session. The 10-year Bund yield was left at 0.28%, the equivalent maturity Gilt was yielding 1.36%, 10-year BTPs 1.91% and Spain’s Bono was at 1.47% at the close.

Newsflow was light, although we did have Standard & Poor’s rating agency suggest that ratings downgrades versus upgrades in the sovereign space would accelerate this year. Most of the culling will come in emerging markets amid news of greater stability around the Eurozone.

In the foreign exchange markets, the sterling currency endured a less painful session, with even some small gains recorded versus the euro and US dollar. The attraction of UK stocks is evident (weak currency/good growth) and the FTSE was again in record territory, with the small companies index shooting higher on optimism for the economy with Brexit fears firmly pushed aside.

In the secondary corporate bond market, spreads ended the session a touch wider for choice. Given the level of bond redemptions, new inflows and coupon income, the primary market ought to take care of itself for the moment. It is – but the secondary market just seems fragile by comparison.

The Markit iBoxx IG index was at B+135bp at the close. The ECB reported on Monday that it held over €51bn of the investment grade non-financial corporate bond market – or just around 10% of the eligible debt as per its own parameters. Yet, the €1.8bn average weekly bond grab is failing to elicit any significant push tighter – whatever is happening in the primary market.

In comparison, the smaller sterling corporate bond market – also helped by around £450m of weekly demand for IG debt by the BoE – is having a better time of it. We’ve had a couple of deals too from primary. Anyway, as measured by the Markit iBoxx index, the sterling corporate bond index is tighter at B+146.6bp – or 6bp tighter in these opening sessions of 2017.

For the high yield market, we still await our first issue of the year. After a bright start to secondary valuations in the opening week, we haven’t quite faded the rally but we are beginning to edge wider.

The cash index was up at B+389bp (+1bp) having stalled in the previous session or two after a ratchet tighter last week. Primary might help, especially if the deals are well-received and perform on the break.

Main and X-Over closed unchanged at 69bp and 290bp, respectively.

That’s it for now; Back tomorrow.  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.