16th September 2020

🗞️ Primary IG credit record beckons

iTraxx Main

53.7bp, -0.3bp

iTraxx X-Over

391.7bp, -21bp

🇩🇪 10 Yr Bund

-0.49%, unchanged

iBoxx Corp IG

B+123.4bp, -1bp

iBoxx Corp HY

B+447bp, -2.5bp

🇺🇸 10 Yr US T-Bond

0.67%, unchanged

🇬🇧 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″]

ESG the way forward…

A trio of IG non-financial borrowers made sure that the midweek session wasn’t going to be too distracted ahead of the Fed. The daily deal flow is chipping away at the record which is now firmly in view as the total year to date of IG non-financial issuance passed the €300bn for only the second time in the Eurobond market’s history. That aside, credit isn’t doing too much, just bumping and grinding a little tighter, for choice, amid investors having an almost narrow focus on the primary market.

The day’s offerings saw a dual-tranche effort from Mondelez, took in a further dual-tranche but in green format from Volkswagen, as well as a sustainability-linked transaction from Novartis. ESG is all the rage at the moment.

Novartis was first on the screens with €1.85bn of a sustainability 8-year issue priced at midswaps+40bp, with the healthcare/pharma group seeing orders of €3.75bn for the bond issue allowing it to price 15bp inside the initial talk. Mondelez took 6-year money and 9-year funding, with €500m and €750m issued, respectively. They were priced at midswaps+50bp and midswaps+70bp, respectively, off a combined book of just €2.9bn and final pricing 20bp – 25bp inside the initial talk across the two tranches.

Following on from Daimler previously, Volkswagen made its own green bond debut with an 8-year offering for €1.25bn at midswaps+125bp and a 12-year transaction priced at midswaps+150bp for €750m. Books came in at a combined €11.4bn resulting in a tightening of final pricing of 40bp – 45bp across the deals versus the initial indications.

As mentioned above, the deal took us to €304.5bn for the year to date – and that already has 2020 as the second-best year for issuance in the IG non-financial market. The annual record from 2019, of €318bn, has a good chance of going this month.

Q4 will be all about as to whether the supply dynamics can hold (through a volatile period taking in the US election) and whether quite incredibly, we get to that €400bn mark.

Elsewhere, Unipol Group issued €750m of a 10-year – in green format – at midswaps+350bp (-40bp versus IPT, books €3bn) and Commerzbank also went green, with €500m of a 5.5NC4.5 senior non-preferred issue at midswaps+130bp (-30bp versus IPT).

We had some activity in the HY market as Intrum tapped its August issue (5NC2, 4.875% coupon) for a further €250m, just as Maxeda DIY Holding was launching €420m of a 6NC2 offering at a yield of 5.875%.

Something to hang our hats on

Ongoing Chinese currency strength will lend a helping hand to exporting countries (and also might keep the Trump administration off their back for the moment). The recovery in the domestic economy and a ramping up of the industrial machinery in China will help the global economy trend a more positive trajectory.

Some of those green shoots are possibly already evident in the Eurozone’s export performance, for example, as they grew for the fourth consecutive month where trade is bouncing back hard. Before that, the UK announced that CPI in August fell to 0.2% (1.0% previously), year on year courtesy of the government ‘eat out to help out’ scheme and is unlikely going to have much of an impact on BoE policy.

However, the session never really got going, with the markets displaying some caution ahead of the Fed and what they might say about the economic outlook (there was no expectation that there would be a change in policy). The lower than expected growth retail sales for August in the US, (0.6% versus 1.0% expected and a revised lower +o.9% in August, all month on month) will have the Fed wary.

The Fed signalled that rates are not changing – rising – until after 2023 and inflation has popped higher than the 2% target for a period of time. The dovish undertones are likely going to serve risk markets positively with event risk (macro and geopolitical and so on) the likely fly in the ointment.

Equities could best be described as treading water, trading around flat for most of the session Europe, and leaving the FTSE off by 0.4% at the close, the Dax up 0.24% and the US markets in positive territory at the European close. After the Fed, they were trading higher.

Rates were slightly better bid in the session before fading to unchanged, leaving the 10-year Gilt yield at 0.22%, the Bund yield in the same maturity at -0.49% and, as at the time of writing, the Treasury at 0.67%.

Credit index saw a big squeeze in X-Over by 21bp as the contract moved to 291.7bp, with just a 0.3bp tightening in Main to 53.7bp. The compression between them taking the ratio to a multi-year low of 5.43x.

In cash, we had the now expected squeeze, with the iBoxx cash index tighter at B+123.4bp (-1bp) and the AT1 market’s better bid saw the index there at B+607bp (-8bp). The high yield market is a little more resistant to the improved tone – as we might expect – but still edged a little better, leaving the iBoxx index at B+447bp (-2.5bp).

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.