21st June 2018

Political risk returns

iTraxx Main

71.0bp, +3.3bp

iTraxx X-Over

309.4bp, +9.2bp

🇩🇪 10 Yr Bund

0.32%, -5bp

iBoxx Corp IG

B+128bp, +0.7bp

iBoxx Corp HY

B+389.6bp, +7bp

🇺🇸 10 Yr US T-Bond

2.90%, -2.5bp

🇬🇧 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″]

Primary window might close…

The markets played out to a defensive tone in the week’s penultimate session as it took in the implications of the trade war as seen through Daimler’s profit warning as well as the appointment of Eurosceptic lawmakers to key posts in the Italian economic ministry. Not that we would have noticed that in the corporate bond market as investors took on board a plethora of deals which were higher beta in nature. The flow of deals suggests that for now (or for Thursday’s session) we are comfortable to take down primary market credit risk which will likely come ‘plentiful and cheap’ ahead of the market closing down for the summer, next month.

It means, to some extent, that the aforementioned event risk situations will be conveniently brushed aside or ‘absorbed’ through additional new issue risk premiums, while secondary likely edges wider for choice depending on the prevailing broader mood. For borrowers, it seems like they’re going to be biting the bullet and getting their funding in. On Thursday, we even had Telecom Italia issue just as Italian equities and BTPs came under some pressure (great timing, that!), while the high yield markets were happy to take down several deals despite the weaker backdrop seen in equities.

It shows that when in the corporate bond market feels borrowers need or want to pull the trigger, they will – and we will absorb the transactions. Deals will price (IPT or otherwise) accordingly in order to make sure they get away and will usually only be derailed if market conditions deteriorate significantly in any specific short period of time. Needs must. Don’t bet on books being as good as they have been, though.

The big picture is now starting to see how the US/China trade war is going to take in more than just those domestic entities trading between the two nations. European companies, for example, manufacturing (cars in the case of Thursday’s profit warning from Daimler) in the US and exporting to China are going to feel the chill in their profitability. Supply chains globally are going to be disrupted too. While Trump backed off on immigration (U-turn on family separations) on Wednesday, the US shows no sign of backing off as regards the tariff battle, just as European Union was readying to implement its own tariffs on US imports (slated to begin on Friday).

It might be a little premature to count on the proverbial ‘.. at the end of the day a deal will get done because…’.

Effusive primary, will it last?

We would have to say that given the nature of the deals on show, primary was in fairly effusive form on Thursday. The only downside was the size of the books for the deals, being less than what they been recently. The IG rated deals in non-financials came from Iberdrola and Autoroutes du Sud. Iberdrola issued €750m in a long 8-year green bond priced at midswaps+67bp which was 18bp inside the initial guidance off a book of just over €2bn. Autoroutes lifted €700m in a 10-year at midswaps+53bp which was 12bp inside the initial chatter, off a book of €1.25bn.

The roll call for high yield took in Bulgaria Energy for €400m in a 7-year at 3.50% and International Game Technology for €600m in a 6-year also at 3.50%. Finally, Telecom Italia managed a book of €1.2bn for a €750m for a long 7-year priced to yield 2.875% (-12.5bp versus IPT), no doubt impacted by the political shenanigans in Italy.

In financials, it was Caixa Geral with 10NC5 Tier 2 notes for €500m priced to yield 5.75% off a book of €800m.

Clouds gather again

Whilst Italy and the trade war were injecting a nervous tone into the market, there was the small issue of a BoE rate meeting occurring. Incredibly, there were a couple more hawks emerging as a result of the vote, which remained in favour of no change in policy, but now by a smaller margin, 6-3 (instead of 7-2 last time).

An August rate hike is incredibly on the cards it would seem – prematurely in our view, given the persistently soft data. Sterling shot higher on the news to trade off a $1.32 handle while Gilts felt a little heat against a more bullish backdrop for government bonds elsewhere. The 10-year Gilt yield rose to 1.33% (+3bp) before later falling back to 1.28% (-2bp). Staying with the UK, the public sector borrowing requirement fell to its lowest level for 13-years in May to just £5bn.

Few genuinely thought that the situation around the Italian political scene was resolved, and while asset prices recovered from their worst levels seen last month, the floor was still lowered for prices. We received a good reminder or rather a shot across the bows that this is a slow burning situation, that we need to be wary and not get ahead of ourselves following the appointment of two lawmakers with those eurosceptic views. It made sure that BTPs and Italian equities underperformed in the session, the yield on the former 10-year benchmark up at 2.75% (+19bp) and Italian equities lower by 2%.

As if we needed it, we also got the harsh reality of how far reaching the US/China trade tiff (as it is at the moment) is going to become. Daimler is one of the first to issue a profit warning, but the contagion impact of its stock drop was felt across the auto sector. German autos took losses in excess 2% and the DAX dropped by almost 1.5%, although VW will have been mightily relieved that it got its hybrid issue away in Wednesday’s session!

US stocks lost around 0.5% (as at the time of writing) managing to record lower losses than European bourses. In rates, the 10-year US Treasury yield dropped to 2.91% (-2bp) while the Bund yield for the same maturity dropped to o.33% (-4bp) and the 5-year yield was down at -0.31% (-5bp) – its lowest closing level in 2018.

Credit wasn’t spared, with protection costs rising sharply leaving iTraxx Main higher at 3.3bp at 71bp and X-Over 9.2bp higher at 309.4bp. Cash took bit of a hit too but the weakness was measured into light selling but the marks went in with the cash iBoxx IG index left at B+128bp (+0.7bp) and the HY index 7bp wider at B+389.6bp.

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.