3rd September 2015

Pile ’em High & Sell ’em Cheap

FTSE 100
6,083, +25
10,048, +32
S&P 500
1,948, +35
iTraxx Main
74bp, unch
iTraxx X-Over Index
340bp, unch
10 Yr Bund
iBoxx Corp IG
iBoxx Corp HY Index
10 Yr US T-Bond

New issue market bluster… Now we are all settled back in our seats, the focus is on that new issue market and how much paper we might expect to emerge in September and through the final quarter. We’re not risk-off in corporate bonds – far from it – but uneasiness around the macro outlook will see equity and rate volatility follow through to the credit market. It’s worked out just like that in secondaries, where trading volumes and flows have been light, but investors are still looking to add risk and as usual, the first port of call is primary.

Why? Sheep. That is, because everyone else is doing it and the safety-in-numbers mentality wins out, leaving the bid for primary intact. The macro-induced volatility might curtail some of the volume and timing of the supply of paper throughout this testy period, but issuance will emerge whenever that window opens, however brief. I will come back to issuance dynamics, technicals and volume expectations later. For now, the start to the post-holiday period has been difficult on macro and weak for equities and has got all manner of market commentators pondering the near-term future. For us in the corporate bond market, it’s a case of “gimme some lovin’ (paper)” as the new issue sluice gates threaten to burst. Today, we had a very good session for supply with the usual decent level of covered bond deals but, more interestingly, several non-financial issues. Toyota’s dual tranche Eur1.5bn was very front-end (2-year and 5-year) – and cheap, with a 10bp premium at midswaps+50bp for the 5-year; Schneider opted for an 8-year Eur800mn deal which eventually came at midswaps+70bp (10bp NIP), while French REIT Icade opted for a Eur500m, 7-year and an initial NIP of some 30bp, becoming 15bp at midswaps+125bp. We could expect a busy Thursday ahead of those non-farm payroll numbers given the impact a big number might have on markets (rate hike talk) and sentiment through next week.

Secondary markets again took bit of a back seat as we suggested they might, above; stocks in Europe also offered little, but respite and stability was all that is needed right now. European bourses were in the black (+0.5%) while in the US, the S&P500 clawed back around 1.8%. Govvie yields backed up some though, while the iTraxx indices played out in a tight range barely changed from the previous day’s closes. Main was stuck at around 74bp and X-Over at 340bp. IG low beta was unchanged to perhaps a touch wider, but higher beta risk – CoCos and hybrids managed to see good interest and prices moved a little better in the session – up to 0.375 points.

US borrowers to pile ’em high, sell ’em cheap?… According to data from Dealogic, euro-denominated issuance from US non-financial corporates is already at a record Eur47.6bn to end August ($60bn), more than double the $29bn printed in the same period in 2014. That’s 26% of the total market for this year so far, beating the 20% we saw in 2007 and set against a medium-term average of around 14-15%. What happens next to US rates and the Treasury yield curve will have a considerable bearing on how much issuance we see from US borrowers in these final few months of 2015. The lower-yielding environment in Europe has been a huge attraction for US entities, and they’ve clearly taken advantage of it. Going forward, this matters because they’ll pay up to get deals away – they will have to, given the poorer performance of the deals printed earlier this year. This will leave investors looking to extract greater new issue premiums as a way of trying to ensure some performance upside on the follow. The net effect of this will be that unless the stars on macro are well-aligned, it might put some moderate pressure on secondary spread levels across the market.

European corporate issuance to gather pace… Over here, European non-financial corporate new issuance had been running at a very high rate and we were heading for 2015 being a record. But the Q2 wobbles put paid to that, though still leaving us with a second best (end-August) level of Eur186bn versus a full-year record in 2009 of Eur285bn (2009 was Eur225bn to end of August), taken from data supplied by Dealogic. We don’t envisage we’ll get to that record level because there are effectively only three months of business left given the traditional slowdown through December. However, after Eur105bn of supply in Q1 (March alone accounted for Eur41bn alone), the months of June/July and August offered a measly Eur10bn, Eur11bn and Eur5bn respectively. The HY market has curried much favour in this low rate/yield/default cycle, with 2014’s record supply of Eur57bn (Dealogic data) probably not under too much of a threat given the more cloudy macro outlook and contagion from the US HY fallout as commodity prices (oil) sink. We’re currently up at Eur44bn. I would think that Eur240-250bn is a reasonable target for IG supply this year, and somewhere in the order of Eur55bn in the HY market. US borrowers should not be shy coming forward, but as a percentage of the total non-financial issuance they ought to drop to closer to the 20% mark.

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.