4th March 2019

Nobody can stop the music

iTraxx Main

61.1bp, -1.4bp

iTraxx X-Over

274.6bp, -5.1bp

🇩🇪 10 Yr Bund

0.16%, -3bp

iBoxx Corp IG

B+144.4bp, -0.6bp

iBoxx Corp HY

B+442.6bp, -1.6bp

🇺🇸 10 Yr US T-Bond

2.73%, -3bp

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Just can’t get enough…

Corporate bond markets were off to a flying start for the week with that €7bn, six-tranche deal from Medtronic leading the way, and pushing US corporate borrower activity in the euro-denominated IG non-financial market this year to a massive 40% of the total. Medtronic was in good company, as it trumped the deals already offered by the likes of Coca-Cola, Altria and IBM, with the US entity deal flow totalling almost €25bn this year.

Interestingly, the last fourteen tranches of deals in the euro-denominated IG non-financial market have come from borrowers with operations primarily based in the USA.

The generally higher levels of issuance are coming because confidence in risk markets is high (€61bn IG non-financial debt pointed already this year) and spreads are tightening on the break for new transactions. And the secondary market is squeezing, returns (IG) sit at 2% YTD with a ‘low rates for longer’ expectation fixed income’s calling card for Q1 – and most likely for Q2.

The confidence in the corporate bond market might just be enough to wrong-foot us all in terms of primary market dynamics. After last year’s low level of deal flow (€220bn of IG non-financials, just €6.1bn in Q4 in HY deals – and a zero in December), we previously forecast that this year might follow the same low level of transactions. But the IG flow is already up at around €60bn and the current run rate once adjusting for seasonal factors (summer lull etc) – if maintained – implies that we could be looking at upwards of €250bn for the full-year.

The confidence and upbeat tone have fed into deals tighter than re-offer on the break in almost all cases, and given a fillip for secondary spreads to tighten by 27bp in IG (B+145bp, iBoxx) and by 80bp in HY (B+444bp) so far this year. Both of these moves have already exceeded (our) full-year expectations. For the moment, higher beta risk is where the best performance is at in the corporate bond market – and the AT1 sector is the outperformer as investors brush aside non-call risk (Santander) while happily funding other borrowers even if the yield on offer looks rich.

Medtronic rules primary

Medtronic: Six-part €7bn deal

The largest corporate bond deal of the year (indeed, one of the largest over the past couple of years) came from US-based medical device maker Medtronic. The increased €7bn deal came in six parts, off an order book exceeding €30bn.

Japan’s Takeda took €7.5bn last year while Sanofi lifted €8bn before it. Such is the strength of the market that even Greece is looking to return so soon after raising 5-year debt (just over a month ago), this time potentially extending to 10-year debt issuance.

Anyway, the US borrower took €500m in a 2-year floater at Euribor+25bp alongside a 2-year fixed €1bn tranche at midswaps+25bp. Then came a 4-year deal for €1.5bn at midswaps+45bp and an 8-year tranche for €1.5bn at midswaps+75bp. The 12-year effort cost midswaps+95bp for €1.5bn and they finished off with a 20-year maturity at midswaps+120bp for €1bn. For the fixed tranches, final pricing was 20-30bp inside the opening guidance.

Elsewhere, in financials we had Credit Mutuel Arkea issue €750m in a 12-year, Tier 2 structure priced at midswaps+255bp.

The other deal in the day came from Nokia. The fallen once mobile telecom giant is now rated in the high yield category and opened the account for the month for this market with a €750m, 7-year deal costing them midswaps+170bp. The book at €2.5bn would have attracted predominately IG investors while final pricing was 20bp inside the opening guidance.

Flattish into end of session

Equities traded in the black for most of the session and resisted in shooting sharply higher on vague talk – or hopes – of a US/China trade agreement being concluded later this month. We have had too much false hope on this issue. With the US markets giving up their earlier session gains as we closed in Europe and moving up to 1% into the red (at the time of writing), they had the effect of fading any gains in Europe and we closed flattish.

Having sold off last week, there was a better bid for duration. In our view, the oversold market was due to correct and yields managed to move lower in the session. The 10-year Bund yield closed at 0.16% (-3bp), the equivalent maturity Gilt ended to yield 1.28% (-2bp) while US Treasuries were yielding 2.73% (-3bp).

Credit markets were preoccupied with that Medtronic transaction, but spreads did manage to edge tighter, for choice. The IG index closed at B+144.4bp (-0.6) and the high yield market closed with the cash iBoxx index at B+442.6bp (-1.6bp).

The iTraxx indices closed with Main protection better offered (lower) at 61.1bp (-1.4bp) and X-Over at 274.6bp (-5.1bp).

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.