25th April 2019

No showers in April…

iTraxx Main

60.0bp, +1.2bp

iTraxx X-Over

255.9bp, +4.9bp

🇩🇪 10 Yr Bund

-0.01%, unchanged 

iBoxx Corp IG

B+124.8bp, -0.7bp

iBoxx Corp HY

B+400bp, -6bp

🇺🇸 10 Yr US T-Bond

2.52%, unchanged

🇬🇧 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″]

…as the month delivers

It would appear that a combination of the earnings season, post-Easter blues and month-end approaching are all conspiring to make for a rather uneventful end to April. Save for the potential for a record in the S&P index. Nevertheless, we can all reflect on a decent opening third of the year for all asset classes, even as macro stutters with risks firmly (we believe) still to the downside. The S&P index stands out as it approached a new record high this week, while returns thus far in 2019 in equities (in excess of 15%, generally) and euro-denominated high yield credit (6.8%) are something to be savoured.

In credit primary, the deals are still flowing (and flying) and have even become a little more varied in that sterling and high yield (and higher yielding) issuance seems to have taken on the mantle from IG non-financial corporate bond issuance which has dropped markedly.

Tesco: £400m deal on Wednesday

In that IG space, before Logicor’s deals on Thursday, Auchan was the last major borrower to chance its arm, back on the 16th of April. Logicor added €900m. So with just €12.9bn issued this month, admittedly with a long Easter break in the middle of it, we have failed to sustain the moment seen in the opening quarter when €85bn of non-financial debt was printed.

Some €31bn of that came in March. Demand remains at very high levels – Tesco’s £400m deal on Wednesday elicited a book of £3.3bn!

Few will likely quibble with that, though, when they look at performance – because credit across the spectrum has delivered some excellent results. We didn’t think the current squeeze in spreads would’ve been sustainable given that in the opening quarter IG spreads (iBoxx index) had tightened by 33bp and by 73bp in the HY market. For April so far, IG spreads have tightened by another 16bp and by an additional 41bp in the HY index.

Deals like those from Netflix, for example, will only add to the confidence we are seeing in the high yield market. While macro is under some pressure, we’re seeing little by way of single name event risk at the moment to scare anyone. Following a relative dearth of deals in the opening quarter, we now have €8.5bn issued this month with other borrowers set to price still this week. For the opening third of the year, the deal total has climbed to €17.7bn.

Back to performance, the rally in the Bund at the moment – pushing yields for the 10-year back below 0.00%, are going to boost monthly/year-to-date total returns some more. Which means more money will quite possibly flow into credit funds chasing that ‘past performance’. There is, therefore, every chance we at worst hold on to the current spread performance and at best improve up on it – but if primary fails to continue apace, it will leave investors severely frustrated.

By the way, the iBoxx IG cash index yield is back below 1.00% at 0.99% and heading inexorably for that ECB QE assisted record low yield of 0.83%. The yield on the iBoxx IG cash index has fallen 63bp this year and goes to show-up why investors are piling into the (higher beta) credit market when the opportunity in the primary market arises.

Primary demand shows no let-up

The day’s deal flow was again light, with IG non-financials – as mentioned earlier – delivering just that deal from China’s Logicor. The deals came in the form of a tap of the 3.25% 2028s for an increased  €300m at midswaps+220bp, and a 2-year fixed offering increased to €600m and priced at midswaps+70bp.

The combined books were €4.2bn and the final pricing on the 2-year was some 30bp inside the opening guidance. The 2-year deal was more than 5x oversubscribed, in line with the levels of demand we’re getting used to now for most offerings.

In the high yield market, Fnac Darty was issuing its dual tranche deal in the form of a €300m 5NC2 structure to yield 1.875% and €350m in a 7NC3 tranche at 2.625%.

Svenska Handelsbanken opted for senior sterling funding, taking £300m at G+85bp. Dutch insurance group, ASR Nederland issued €500m in a 30NC10 Tier 2 effort at midswaps+300bp – with the book up at a massive €5.25bn (bookstore than 10x!).

M&A – or lack of it, dominates news flow

It was a day for collapses of large corporate mergers. In the UK, the competitions regulator blocked the Sainsbury proposed £7.3bn takeover of Walmart-owned Asda, citing concerns that prices would rise in supermarkets. The regulator failed to be convinced that prices would fall, and the competition would decline generally – even with the rise of Lidl and Aldi.

In Germany, Deutsche Bank and Commerzbank bowed to much shareholder pressure and abandoned merger talks which would have created the Eurozone’s second-largest bank. Our bank’s analyst had previously suggested that a merger of the two ‘Zombie banks’ would not have guaranteed success and that the “underlying problem is that the German banks have failed to transform their business models and are not agile to reflect new realities”. The door is now open for the likes of Unicredit, for example, to make their move.

On the earnings front, we had another mixed day with Bristol-Myers raising full-year forecasts after beating on earnings and revenues in Q1, 3M missed as did UPS but the postal group maintained its full-year outlook. US durable goods rose 2.7% in March against expectations pitched at 0.7% and a drop in February of -1.1%.

Equities in Europe played out the session in the red, with that record still eluding the S&P even as it was trading up in the session after a weaker opening. In Europe, the FTSE ended 0.5% lower, the Dax just 0.2% with most other bourses slightly in the red.

That mixed bag failed to see much of a response in the rate market although the 10-year Gilt was better bid, left to yield 1.15% (-3bp). The Treasury yield was doing very little at 2.52% (unchanged) and the Bund was also unchanged to yield -0.01%.

In credit, the primary market was just about the main distraction, although some were pondering the next move in the Deutsche/Commerzbank saga. So with little activity, it left the iTraxx indices to push higher a touch, with Main up at 60bp (+1.2bp) and X-Over at 255.9bp (+4.9bp).

In the cash market, we squeezed some more. That left the iBoxx cash IG index at a new 2019 low of B+124.8bp (-0.7bp). We had some moderate weakness in the high yield market which left the index at B+400bp (+6bp) – noise.

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.