21st March 2018

Primary needed to alleviate the tedium

iTraxx Main

58.3bp, -0.4bp

iTraxx X-Over

284.6bp, -0.8bp

10 Yr Bund

0.59%, +1bp

iBoxx Corp IG

B+103.5bp, -+xbp

iBoxx Corp HY

B+320.1bp, -0.7bp

10 Yr US T-Bond

2.88%, 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=”10″], [wp_live_scraper id=”11″]

Issuance drop a concern…

A pre-Easter flurry, with effectively six sessions left in which to get some business done before we see out the quarter, could see €5bn – €10bn of IG non-financial issuance. Up to €2bn in high yield would be absorbable, while anything the senior and subordinated bank debt market throws at us will be taken down. Anything over €5bn takes us over the line and past €30bn in IG non-financials which was our original target for the month and gives the quarter an element of respectability even if we’re down on every previous quarter for at least the last five years. That’s because the total issuance in the quarter is unlikely to pass €65bn, but more likely come in at around the €60bn mark versus a longer-term average in excess of €75bn.

Should we feel so flummoxed that the level of primary activity has been so low? After years of extolling the virtues of getting funding in while rates are low, hoarding that cash and having problems getting a decent return on it, the corporate sector has gone relatively mute. Admittedly the economy is looking perkier, but we’re hardly breaking out into some kind of breakneck expansion phase requiring copious levels of investment. We could also do with more transformational M&A if indeed the future does look bright.

So corporate balance sheets are liquid and bloated. The bare minimum we will see will be refinancing of maturing obligations although even here, plentiful cash balances will allow treasurers to pick and choose their timing. That type of issuance though will likely keep us ticking over. Funding costs for corporates have barely moved much and broadly reside at historic low levels which the ECB has managed to manipulate for their benefit. There’s no rush.

AXA: €2bn issued

But why does primary matter so much? Well, because there’s isn’t too much happening otherwise in a market where secondary is barely functioning. And it matters more now because at the start of every year is when most of the big business from a primary market perspective is done (followed by the September/October months). Investors also feel they get a better deal in primary in terms of an allocation of some kind, usually some premium versus that artificially tight secondary curve and some spread upside as a result. Although, for the latter, that isn’t quite the case at the moment with many deals failing to push on after the break. That might change should a broad bid for risk assets re-emerge.

For the record, primary was very quiet – as we might have expected on ‘FOMC day’ – but we did manage to get a couple of financial transactions away. AXA issued €2bn in a M&A refinancing motivated deal taking in a Tier 2, 31NC11 fixed-to-floater format at midswaps+220bp, which was 10bp inside IPT off a 2x subscribed book. The other deal was an unremarkable €200m offering from Grenke Finance.

Risk markets mixed

Ahead of the Fed announcement, the risk markets were playing out with a positive tone – in the US. That came even as the scrutiny around Facebook increased – but its share price effectively stabilised, with some perhaps thinking it has sold off enough in the previous couple of sessions. In Europe, equities ended up trading in mixed fashion across the various bourses, a small up or down. The UK markets were underperformers with sterling currency strength acting to dampen enthusiasm for UK stocks. That came as market rates rose following the upbeat employment data for January (unemployment rate down, employment rate up and wage growth higher).

That means Gilt yield rose as a May rate increase came back into focus (a day after some were thinking might not following lower than expected consumer price inflation). The 10-year Gilt yield rose to 1.53% (+4bp) while the equivalent maturity Bund yield rose a basis point to 0.59%. Yields in the US were also higher in the immediate aftermath of the rate hike, the 10-year there up at 2.92% (+4bp) before heading to unchanged at 2.88%.

In credit, the synthetic markets were slightly better offered with the new Series 29 Main contract at 58.3bp (-0.4bp) while Series 29 X-Over was less than a basis point lower at 284.6bp.

The picture in cash was very similar with the IG cash market unchanged at B+103.5bp and the HY market also barely moved, leaving the Markit iBoxx cash index at B+320.1bp (-0.7bp). In all, a fairly dull day.

And then there was the Fed

The Fed raised rates by 25bp, largely as expected, but the tone of the message was less hawkish than some feared. The markets barely moved much immediately following the announcement, much relieved we think as it looks for another two hikes this year. Clues as to a fourth would have elicited a different market reaction. Into the close, US stocks were all in the red in a confusing session.

The FOMC meets again in around 6 weeks time (May 1-2) leaving us with a clear run (no earnings season, for example, to contend with) of economic data to keeps occupied. And geopolitics, of course. The UK monetary policy committee is up on Thursday although no one is anticipating rate action – more, clues as to the likelihood of a UK base rate hike of 25bp come May.

That’s it, We have five or six sessions now in which to get some good business done on the primary front before we close out the quarter. A steady flow of deals would be welcomed and we think that this could well be the case given the size of various pipelines.

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.