18th September 2019

Panic stations, but few worry

iTraxx Main

48.0bp, -0.5bp

iTraxx X-Over

247.0bp, -2.5bp

🇩🇪 10 Yr Bund

-0.51%, -4bp

iBoxx Corp IG

B+122bp, +2bp

iBoxx Corp HY

B+395bp, unchanged

🇺🇸 10 Yr US T-Bond

1.75%, -6bp

🇬🇧 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 borrowers flood the market

It almost seems like panic selling… of debt securities by corporates. It ought not to be the case (or viewed that way) because low funding costs are here to stay. However, it’s rational that corporates are in the market as they can, in many cases, borrow easily and be paid to do so – just as Glaxo’s front-end €2.5bn grab demonstrated earlier this week. The drivers are obvious and made possible by the plummeting in funding costs this year. There’s a huge element of prefunding obligations which might not even come due until late next year or the year after. But the cash can also be used to buy back shares, boost P&L, increase EPS and prop-up share prices! And if it costs next to nothing – or nothing to issue, why not?

Admittedly, there’s a receptive investor base ‘panic’-buying the deals as they are offered. It’s got to be ECB-related as the deepest pockets in the market readies for action. As a result, we’re heading for the best month of issuance since 2014, and a record year for IG non-financial volumes. The follow-through into the high yield primary market – as yet – is missing, but that might come closer to/or after the purchase programme has commenced. Or when IG spreads have managed to crunch more from current levels.

The primary issuance numbers in the IG non-financial market are massive. For September, with just under two weeks to go, we’re past the €40bn mark – up at €42.6bn – and heading for the best monthly level since March 2016’s print of €45.8bn. For the year to date, the total comes in at €245bn. Even an average level of issuance from now to year-end will see us beat the record €285bn issued in 2009. Furthermore, it looks like a €300bn issuance amount for the full-year is going to happen.

Fresh money pouring into credit is looking for a higher-yielding fixed income asset as government bond rates drop deep into negative territory. And/or, it is chasing this year’s already had performance. IG total returns are now approaching 8% year to date, high yield investors are sitting on over 10% and the AT1 market delivers in excess of 12%.

There is still some juice left in the market but the next 3 months will add only a couple of percentage points to those numbers. When we reset the ‘returns counter’ for 2020, the outlook is going to resemble a dustbowl, performance-wise.

Records in sight in primary

Blame it on the Fed or otherwise, but we had a much needed, quieter session in the primary market, allowing investors a breather and time to absorb the welter of previous issuance. Most deals launched this month are already trading tighter versus reoffer levels and the lull in Wednesday’s session will only serve to keep the secondary market performance propped up.

The €7.9bn of IG non-financial deals on Monday, followed by another €4.9bn on Tuesday (€2bn Wednesday), would normally – combined – be close to 60%/65% of the total volume for the average month. We had high yield, hybrid and senior financials deals too, so a break serves the market and valuations well.

On Wednesday, the two IG non-financial borrowers were Telenor and Mondelez. The Norwegian telecoms group issued €1.5bn equally split in a three-tranche transaction, they printed at midswaps+40bp in a 4-year, midswaps+60bp in an 8-year and followed up with a 12-year deal at midswaps+70bp. Books came in at around €5bn and final pricing was 20bp – 25bp inside the opening guidance across the tranches.

As for Mondelez, the US group took €500m in a 12-year at midswaps+98bp (-17bp versus IPT), with books around 2x subscribed at guidance.

Elsewhere, Spain’s Kutxabank issued senior non-preferred debt for €500m at midswaps+100bp (-25bp versus IPT) and Wells Fargo went the HoldCo route for 10.5-year of €1bn debt at midswps+75bp (-25bp versus IPT). The other deals of note were Barclays’ PerpNC6 T1 priced to yield 6.375% for £1bn, with books up at a huge £7.5bn, while CIBC issued £300m of senior bail-in debt in a 6-year maturity at G+130bp.

All about the Fed, what else?

A FOMC-wary session left risk markets in a ‘no man’s land’ of sorts. Equities in Europe did very little and closed flattish. In the US, and pre-Fed, equities were in the red by up to 0.3%. As expected, the Fed cut rates by 0.25%, while the accompanying statement suggested a more hawkish tone. US stocks closed unchanged.

Oil prices dropped by a little over 1.5% on easing fears of aggressive price rises, as the Saudis endeavoured to get facilities back online after the drone attack last weekend. The US administration also announced new sanctions on Iran but that seemed to have had no impact on prices.

Rates were better bid and we saw some material moves through the session. These saw 10-year benchmark Gilt yields lower at 0.63% (-6bp), the Bund yield dropped to -0.51% (-4bp) and Treasuries in the same maturity closed at a yield of 1.79% (-2bp) – off the session lows after the Fed move.

Credit index had iTraxx Main at 47.5bp (-0.5bp) and X-Over at 247bp (-2.5bp) also reflecting the marginal positive day for European markets.

The cash market had something of a rest in primary, enabling the Street and investors an opportunity (as mentioned previously) to take a much-needed breather. The market was slightly better offered, though, and basically noise in the big scheme.

And so, the Markit iBoxx IG index edged 2bp wider to B+122bp representing the first IG index-related spread reversal in a week. Similarly, we saw the same in the AT1 market which was slightly better offered. The high yield market closed unchanged. The index was at B+395bp.

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.