24th October 2019

November Promises Much

iTraxx Main

51bp, +0.4bp

iTraxx X-Over

229.3bp, +2.1bp

🇩🇪 10 Yr Bund

-0.38%, +2bp

iBoxx Corp IG

B+115.7bp, -1bp

iBoxx Corp HY

B+404bp, +5bp

🇺🇸 10 Yr US T-Bond

1.75%, 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″]

Not bad. Not bad at all…

There are still five session left in which to get business done before we close out a decent month for credit markets. Total returns in IG are very slightly negative, affected by the sell-off in the underlying this month, but spreads (iBoxx) are 10bp tighter so far. As if anyone needs a reminder, high beta credit has performed much, much better. The AT1 market is up by 1.3% in the month so far (+13.8% YTD on AT1 index spreads 265bp tighter) with the high yield market flat for the month in total return terms.

HY spreads are just 15bp tighter in October. Generally, we have continued to preserve performance in both absolute and spread terms. In addition, the clock ticks for the ECB’s intervention (Friday onwards) and we look for performance to improve on the back of it through to year-end, seeing out a fine 2019 for credit investors.

Credit primary has seen the high yield market flourish this week with a spate of deals. There were some juicy ones in there, too. Investors were happy to take down Crown’s 3-year maturity 0.75% yielding deal, and pushing back on the Kantar deal to get that borrower to pay up for its funding (9.5% yield on one of the tranches).

On Thursday, we had Eircom’s issue priced, with €350m in a senior secured structure priced to yield 2.625%. VodafoneZiggo’s deal was also finally priced after final terms were given on Wednesday.

So far this month, the high yield market has printed €7.3bn of deals, which (by some margin) is already the second-best October month on record. 2018’s record year saw €13.7bn issued in October. For the year to date, the HY primary market has seen nearly €56.2bn issued.

Another €5.6bn before year-end would take us past last year’s total, which was the second-best on record. It’s looking increasingly likely that we will exceed it this year.

In IG, €20bn has been issued in non-financials, where another €6bn would leave it the best October since 2014. That’s probably a bit of a stretch, but the €271bn issuance year to date leaves us just €14bn short of the record seen in 2009. That’s a far more likely target and we are looking at somewhere north of €300bn still for the full-year.

… unless it’s macro, of course

Draghi’s swansong ECB press conference put a stop to any chance of material activity. In fact, credit primary offered up just the single deal from Eircom DAC (although VodafoneZiggo’s deal from Wednesday was also priced). We at least had the chance to look at the economic data stream in the session and it made for a horrible read/outlook.

Eurozone macro data showed some divergence between Germany and most of the rest of the Eurozone. But that won’t last as the latter group of countries will get dragged down by the weakness in German industry. The PMIs made for a very uncomfortable read with the weakness in the German industrial sector spreading to other sectors, including services.

France might have the upper hand for the moment, for example, but it is scant consolation. A sustained downturn in Germany will affect France as well, eventually.

We’re starting to see earnings from the industrial sector show the cracks beginning to appear as margins are squeezed, especially evident at the moment across the auto sector. The outlook is bleak, and 2020 looks depressing. Inflation is declining, investment and business confidence are waning, industry is showing greater strains, exports are falling and growth numbers suggest we are heading for recession territory across the region.

The central bank has already unleashed a massive stimulus package, but a baptism of fire it is for the incoming Christine Lagarde (pictured)who will not want to see the ship sink much further on her watch. Dare we suggest further action from the ECB will be in order, perhaps in Q2 2020, after we have felt any impact of the current stimulus package?

In the US, and adding to the macro data gloom, durable goods orders declined by 1.1% in September versus -0.5% expectations with the core numbers at -0.3% and -0.2%, respectively. On the earnings front, Tesla‘s Q3 stands out after smashing analysts’ forecasts of a loss as it turned in a profit and delivered a record 97,000 cars in the last quarter.

So with all that, the gloomier overall picture didn’t deter markets. Equities rose and the Dax is up 3% this month (around 17-month highs), after adding 0.6% in the session. The S&P was in the black as well – just, and is less than 1% away from hitting a new record high. The FTSE added 1%.

In rates, US Treasuries were unchanged, the 10-year yield at 1.75%. The Bund yield added 2bp, to yield -0.38%, while the 10-year Gilt yield dropped to 0.62% (-6bp) with news emerging of a possible general election motion being tabled on Monday. The Brexit-related drama continues.

In credit, the indices edged a touch wider with Main at 51bp (+0.4bp) at the close and X-Over up at 229.3bp (+2.1bp).

As for cash, there’s a year-end feel already in secondary, but also some anticipation as to what the ECB’s QE might bring. Nevertheless, we squeezed tighter and that left the iBoxx index at B+115.7bp.

The highest beta of markets squeezed a little more, with the runaway credit market this year seeing 10bp of tightening in the index, as AT1 spreads squeezed to B+445bp (-55bp this month). The high yield market, probably weighed down by the recent spate of deals, moved 5bp wider to B+404bp.

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.