22nd May 2018

Pausing for breath

iTraxx Main

59.5bp, -0.3bp

iTraxx X-Over

279.3bp, -1.8bp

🇩🇪 10 Yr Bund

0.56%, +4bp

iBoxx Corp IG


iBoxx Corp HY

B+342.3bp, -1.4bp

🇺🇸 10 Yr US T-Bond

3.07%, unchanged

🇬🇧 FTSE 100 [wp_live_scraper id=”4″], [wp_live_scraper id=”5″] 🇩🇪 DAX [wp_live_scraper id=”12″], [wp_live_scraper id=”13″] 🇺🇸 S&P 500 [wp_live_scraper id=”15″], [wp_live_scraper id=”16″]

Respite session…

Finally, some good news! First off, the Chinese announced a reduction in auto import tariffs to 15% from 25%, with some speculation that they will need/have to cut them further. We await news on other sectors/products having import tariffs reduced. And then we had some bottom fishing around Italian debt markets which was inevitable given the massive sell-off that had seen 10-year BTP yields jump by over 60bp in just this month. Buying in now – as tempting as it might be – might be a little premature.

Even the UK’s public sector net borrowing was the lowest in 10 years.Embracing the news we would have hoped for a big boost to risk markets. That slight bit of improved news flow comes after a week or so of more difficult headlines/events after all. The primary market credit reopened as well, after a couple of sessions of low/no activity but there was only a more balanced feel to the mood in the markets.

The opening Chinese tariff salvo is a welcome start in the US administration’s efforts to redress the trade imbalance between the two nations – other countries will benefit from it too – and the markets will get a leg up from it.

The Italians simply (?) need fiscal flexibility that the single currency regime doesn’t allow. So the Italian political situation is a little more difficult to assess, not least because the reality of being in government/power and trying to play hard ball with its Eurozone, Brussels-based paymasters might see a pull back in the tough talk and a watering down in the currently announced crunching policy objectives.

There will be a sense of relief across the markets should they back off, Italian debt prices across rates and credit will rally – probably close to where they were a couple of weeks ago. If not, then Italy is going to be a bigger headache for the European Union/Eurozone than Brexit.

One can dramatise it all, and think that the battle lines have been drawn. We’d rather just stay sidelined and let events play out. For sure, reform of the Eurozone as Macron sees it isn’t going to happen or be agreed upon anytime soon.

Anyway, it was respite Tuesday. The FTSE added another 0.24% to set a fresh record high with 8,000 now in sight. Credit cash edged wider through this relatively sustained period of weakening in spreads though. The BTP 10-year yield dropped to 2.28% in the session before rising a touch and settled at 2.32% (unchanged) at the close – having seen 2.42% in the previous session. The corresponding rise in Bund yields would have seen the (now much watched) spread between them tighten several basis points.

Primary reopens with a flourish

Deutsche Telekom: Deal-fest

In primary, we had a couple of IG non-financial borrowers in the market with multi-tranche deals. First to price was Dutch electricity grid operator Tennet with €500m in a 10-year at midswaps+45bp and a 16-year deal at midswaps+62bp, with the deals priced 10-13bp inside the initial price guidance on order books at a combined €2.5bn.

Deutsche Telekom followed with a 4-tranche effort. They lifted €400m in a 4.5-year floater priced at Euribor+35bp (-15bp versus IPT), €500m in a 4.5-year at midswaps+35bp (also -15bp versus IPT), €1bn in a 7.5-year at midswaps+63bp (-12bp versus the opening guidance) and €1bn in an 11.5-year maturity at midswaps+90 (10bp inside the guidance). Order books were at around €5bn.

So €4.15bn issued for the week’s opening deals, takes us to a relatively sprightly €94bn for the year to date, but still €34bn behind the full opening five months total for the same period last year (-28%). For the month, we’re up at €24bn needing just a couple of deals (for €2bn or so) over the remaining 6 business days (long UK weekend ahead) to make it the best month for issuance in IG non-financials this year. It’s not a tall order given the pipeline with Whirlpool, innogy, and LafargeHolcim amongst others all expected as early as Wednesday.

In high yield, Du Pont spin-off Chemours priced €450m in an 8NC3 senior unsecured structure at the higher end of the initial range of 4%. The tally for the month of deals rises to €4bn, which after the prolific opening period this year is perhaps lower than we might have been entitled to expect. Year to date, it’s now €34.5bn versus €25.7bn for the Jan – May period last year.

Markets more relaxed, cash credit spreads leak

So the FTSE closed at a fresh record high, close on 7,900, and one of the referendum remainer arguments for a financial crisis can be well buried. As suggested above, we are now a whisker away from 8,000 and with rates on hold and the currency generally playing ball, we could be there before the end of the month. The Dax was also higher, as it added 0.7% in a broadly better day for European stocks which saw the US markets a little more tentative and mixed (small up/down).

As for rates, Gilt yields rose to 1.52% (10-year, +4.5bp), Treasuries were unchanged at 3.07% while the 10-year Bund moved 4bp higher to yield 0.56%.

In line with the better tone, we had some recovery in credit protection. iTraxx Main edged lower to 59.5bp (-0.3bp) with X-Over protection 1.8bp lower at 279.3bp.

The same can’t be said for cash credit which saw spreads edge a little wider, leaving the Market iBoxx IG index at B+114.3bp (+1bp) – and the sixth consecutive session of weakness (+8.3bp). Supply has picked up but been hit-and-miss in a sense nevertheless, so we can’t point to that as being the reason for this persistent and quite expectation busting spread weakness.

At least we didn’t see the same direction and weakness in spreads in high yield, although the session in secondary was very light. The iBoxx index closed at B+342.3bp (-1.4bp).

Have a good day.

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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.