18th September 2018

One hand giveth…

iTraxx Main

59.5bp, -0.8bp

iTraxx X-Over

279.8bp, -2bp

🇩🇪 10 Yr Bund

0.48%, +2bp

iBoxx Corp IG

B+131.5bp, -1bp

iBoxx Corp HY

B+383bp, -3bp

🇺🇸 10 Yr US T-Bond

3.04%, +5bp

🇬🇧 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″]

The other taketh away…

Deals galore littered the primary markets in one of the heaviest sessions for a while – most likely this year so far in terms of the number of issuers. There was SSA issuance, covered bonds, IG and HY corporates, senior and subordinated financials and in dollars, euros and sterling currencies. So we worked through a busy session. IG non-financial deal flow, though, was limited to Vinci and DP World. The drought goes on here. The deluge of deals elsewhere was probably a useful distraction, but we do need a material pick-up in non-financial deals to satiate investor needs.

The low single-A rated French construction giant is a relatively infrequent borrower, but investors in the largest sector of the corporate bond market were left with slim pickings otherwise, and as if to highlight the desperate nature of the limited supply in IG corporates, the book for the Vinci dual-tranche deal exceeded €7bn. It was a good deal for Vinci though, after all they managed to reduce final pricing by up 20-22bp.

We are fast closing in on the final few sessions of the month and we have a Fed meeting to come which will likely close funding windows for a session or so. Add into that the “ECB QE purchase programme is reduced further from October by 50%, so let’s get a deal away before that occurs” marketing ploy, we had ought to see a more material pick-up in the non-financial supply dynamics. We think.

Other than that, the markets were showing little by way of concern on the US/China trade spat, especially with the US administration looking to add tariffs on a further $200bn of Chinese imports next week. The Chinese eventually retaliated with tariffs of 5-10% on $60bn of US goods, but there seems no let up in the pressure from Trump.

One would have thought that it would probably be difficult for the markets to rally in any significant way while this is the case, if only because the trade war remains the single most important economic/geopolitical risk event facing the markets right now. That wasn’t the case on Tuesday as the S&P rallied to within an inch of setting a record high!

The markets do need a good result though – compromise from both sides. Failing that, data supporting that the US economy is continuing to suggest it is chugging along nicely at 3.5-4%+ growth with the odd (two this year still pencilled in) rate increase into it, and this might be enough to keep equities propped up. And importantly for us, credit spreads stable to better bid.

Busy syndicate desks

As for the primary market, Vinci was the leading deal with €1.75bn issued through a dual tranche offering. That came in the form of a 7-year €750m at midswaps+45bp (-20bp versus IPT) and €1bn in a 12-year at midswaps+65bp – a massive 25bp inside the opening guidance with the €7.3bn book skewed towards the 12-year, hence the pricing crunch.

The other non-financial borrower was DP World which took €750m in an 8-year at midswaps+175bp (-10bp versus IPT) on a book just shy of 2x subscribed, and with the borrower also taking £350m in a 12-year maturity at G+270bp.

These deals take the total IG non-financial deal flow to over €17.5bn now for the month so far. We think a total of €30bn+ for the month is within reach.

In the high yield market, we were still awaiting pricings for Interxion and Refinitiv.

In financials, the senior sector saw DNB Bank print €750m in a 5-year at midswaps+28bp versus an initial guidance of midswaps+35bp. Sumitomo Mitsui went the green bond route with a €500m 2-year floater at Euribor+25bp generating a €2.3bn book and reducing final pricing by 15bp versus the opening chat. Lansforsakringar Bank lifted €500m in a 5-year senior non-preferred issue at midswaps+57bp.

BBVA took €1bn in an AT1 PNC5 structure paying 5.875% with an order book in excess of €5bn, and 50bp inside the opening guidance.

Elsewhere, worthy of a mention was Cyprus’ €1.5bn 10-year deal at midswpas+240bp, with order books at over €5.5bn. Austrian real estate group CA Immobilien issued €150m in a 7.5 year maturity at midswaps+145bp. And CYBG plc, a holding group with interests in various UK banks took £500m of HoldCo funding in an 8NC7 issue at G+280bp.

Tariff tension ignored

As for the other stuff, the focus for most observers was on the US trade tariffs, but the markets seem fairly complacent on the matter as we suggested above. Another $200bn of Chinese exports to the US are expected to be slapped with 10% tariffs (initially) next week, but the markets are showing little concern. That might change in due course.

So, the S&P was past 2,900 again (and just 12 points off achieving a new record high as at the time of writing at 2904) which eventually dragged most European bourses into the black – but by a much smaller degree.

Rates were better offered, with the 10-year Gilt yield up at 1.57% (+7bp) ahead of the crucial EU meeting on Wednesday, while the equivalent Bund yield rose to 0.48% (+2bp) and the US Treasury through 3%, up at 3.04% (+5bp). Returns in fixed income for September are going to look a little under the weather if the sell-off continues.

Synthetic credit wasn’t getting carried away with anything, with Main just 0.8bp lower at 59.5bp at the close and X-Over 2bp lower at 279.8bp.

Secondary cash was quiet, but we managed to edge tighter again. That left the iBoxx IG cash index at 131.5bp (-1bp) and the high yield index 3bp lower at B+383bp.

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.