19th September 2019

Primary’s going to erupt again

iTraxx Main

47.8bp, -0.3bp

iTraxx X-Over

245bp, -2bp

🇩🇪 10 Yr Bund

-0.50%, +1bp

iBoxx Corp IG

B+122bp, unchanged

iBoxx Corp HY

B+395bp, unchanged

🇺🇸 10 Yr US T-Bond

1.79%, 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″]

Much needed breather sets us up nicely…

The latest round of central bank meetings are over. We have been left a bit to think about, though, with the Fed alone failing to offer a dovish note. The US central bank didn’t really nail it in the sense that they only did enough to keep the markets guessing some more, with Powell preferring to adopt a ‘moderate adjustments’ policy to the fed funds rate. However, it is time for markets to trade free from the shackles of policy uncertainty and focus on the incoming data as well geopolitical machinations wherever they might be. Few are fretting about any of it in European credit. We’re just waiting for the next deal (and they’re coming in droves) in a year which looks odds-on to set a new record for IG non-financial issuance. €300bn is our target (€246bn now, €285bn record in 2009).

In credit primary, only on one day this month have we not had an IG non-financial corporate bond deal which in itself is a remarkable run. In Thursday’s session, ITV and Continental kept the near-daily dose of deals from this category of borrower intact.

Few will quibble with the slowdown, as we have suggested in previous comments. It gives us all break and a chance to absorb the heavy volumes of late. It prevents investor indigestion and generally should be viewed as a positive development.

In secondary credit, the crunch tighter that the market experienced after the ECB announced its QE programme has reversed a little. The early euphoric (?) response was faded, quickly. There has been concern around that Saudi oil installation attack, some weakness in macro data (China industrial growth, for example) and clearly a bout of apprehension across the whole market heading into this week’s FOMC.

With some of those issues now addressed, or being addressed, we should be looking for a resumption in the tightening trend which will be helped if corporate primary (financials and non-financials) doesn’t come up with €10bn-like sessions like we have seen of late. That level of volume was always going to check the tightening in spreads.

So the IG index spread is at B+122bp and still 4bp tighter post-ECB and 50bp year to date. The record low index spread is B+83bp and we have been looking at that as a target for Q4/Q1 given the re-entry of the ECB as a marginal buyer – albeit unwelcome – come November. We also seem to have a halt to the HY/IG compression trade although we’re sure that will re-emerge as a medium-term trade dynamic.

Primary still printing away

€600m deal for ITV

So the day’s primary took in ITV’s upsized €600m of 7-year debt priced at midswaps+170bp which was 20bp inside the opening guidance off a €1.6bn book. It was followed by Continentals AG’s increased €600m transaction, which was a short 6-year priced at midswaps+75bp and also 20bp inside the initial chat, with books up at €1.4bn.

Other issues in the market saw Ireland’s Permanent TSB issue €300m in a 5NC4 structure at midswaps+255bp. Achmea took €500m in a PerpNC10 variable deal priced to yield 4.625% and followed up with €250m of a 20NC10 sub variable deal at midswaps+265bp.

REIT Alstria Office issued €400m in a 6-year at midswaps+105bp (-20bp versus IPT), while TLG Immobilien added a €100m tap to its €500m hybrid deal from earlier this week.  IG issuance YTD is looking like this (see chart, below) – thanks in a big way to September’s bonanza:

We are now up at €43.7bn for the month so far in IG non-financial issuance. Another €2.1bn – which will undoubtedly come early next week, will take us to September being the best month of any we have seen in over 5 years.

The high yield issuance total has crept up to €45bn (versus €62bn for the whole of last year) and the senior issuance volume for the year to date now comes in at €128.5bn and just a deal or so away from 2018’s full-year total.

Markets emerge post-FOMC in positive mood

The markets eventually struck up a bullish tone. That left rates unchanged to a touch better offered the session. The 10-year Gilt yield closed to yield an unchanged 0.64% coming after the BoE left rates unchanged (0.75%) but cautioned that the next move could be a cut should Brexit and global uncertainties persist. The Bund yield edged to -0.50% (+1bp) and US Treasury yield in the same maturity was unchanged at 1.79%, as at the time of writing.

Equities led the way, on the front foot with European stocks closing up to 0.7% higher with US markets not far behind, around 0.5% at our close.

As we approach the new contact roll, S31 Main closed at 48.2bp (-0.3bp) and X-Over at 245bp (-2bp).

IG cash closed unchanged with the iBoxx index at B+122bp, the AT1 index at B+492bp (-3bp) and the HY index at B+394bp. And all set up for the next leg of tightening!

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.