4th October 2017

Records there to be broken

iTraxx Main

56.9bp, +1.4bp

iTraxx X-Over

248.7bp, +1.3bp

10 Yr Bund

0.45%, -1bp

iBoxx Corp IG

B+107.6bp, +0.3bp

iBoxx Corp HY

B+208.5bp, unchanged

10 Yr US T-Bond

2.34%, +1bp

FTSE 100

7,467, -2


12,971, +69

S&P 500

2,537, +3

Catalonian crisis for EU…

Primary markets sprung back to life with plenty of smaller-sized IG non-financial deals alongside a fair number of senior financial offerings. Credit market investors were focused on those. The markets elsewhere were in an uncertain mood as the DAX managed to open sharply higher to an intraday record high, before slipping back to trade around flat and then finally up 0.5% in the session – and a record close. The Eurozone economy looks to be in rude health, with yet more data suggesting some solid foundations are being created. Yesterday, it was the Eurozone’s business activity on the up as evidenced by the September composite PMI which came in at 56.7 (55.7 in August).

Spain: There may be trouble ahead…

The obvious blot on the landscape now is the ongoing unrest and developing situation in Catalonia – likely declaring (illegally?) independence in the next few days. The EU are watching closely; The markets are for sure. Catalonian regional debt is feeling the heat, as we might expect with yields jumping sharply higher (+175bp on the 2018s since the June lows).

Spanish sovereign debt is too, as Bonos took some more of a hit in the session leaving the 10-year yield to rise to 1.80% (+8bp), before settling at 1.76% (+2bp). The IBEX index was off 3% and a clear underperformer in the session. More generally, we had a better bid for government bonds at the open, but we faded it and left yields edging higher in most cases.

The UK also continues to show ongoing signs of weakness (to come) as the service sector’s PMI came in at 53.6 for September (53.2 in August) suggesting only a very small uptick in the expansion rate. That potential November rate hike looks more difficult to justify as each data point (which excludes inflation) is released. Gilts were slightly better bid initially, but we faded it and into the close as the Gilt market was better offered following a rather disjointed and cough-affected effort by Theresa May at the Tory Party conference. The 10-year Gilt yield rose to 1.38% (+3bp).

For credit markets, it was the plethora of corporate deals that kept us occupied. Nothing too meaty, mind, but enough to arrest the feeling of a decline in market borrowing of late. The fleshiest deal was the €4bn, 5-year deal from Ireland as it raised debt to pay off the final obligations of its recent bailout-era funding. So a belated start to the week on the primary front and we need to have another good session on Thursday as Friday’s activity will be curtailed ahead of the US non-farms employment release.

Itsy bitsy teeny weeny…

The list of deals has followed a trend of late whereby we are seeing lots of smaller transactions in a session, interspersed with odd sessions whereby a major blue chip borrower might fund a dual or triple-tranche offering. As it was, financial issuance dominated in the session, but we had a little of something for everyone.

Sumitomo Mitsui Financial Group took €500m in 7-year funding as did La Banque Postal in the same maturity, and for the same amount. Italian credit union Iccrea Banca issued a 5-year maturity deal for €600m and Aktia Bank went for a shorter 3-year for €300m.

In the non-financial IG sector we had Legrand for €400m in a 6-year at midswaps+22bp and they managed to knock a massive 18bp off the initial price talk. Cofiroute took 15bp off the initial mumble to print at midswaps+35bp in a 7-year for €750m. FCA Bank SpA (JV between Credit Agricole and Fiat Chrysler) lifted €800m in a 3-year at midswaps+42bp (and -13bp versus IPT).

Finally, we had the unrated Munich-based BayWa AG issue a PNC5 hybrid structure to yield 4.375% (the deal likely implied to be rated sub-investment grade).

Finally, we did have some sterling issuance with Notting Hill Housing Trust print a £400m 31-year maturity transaction at G+135bp and Segro take a combined £750m in 12-year and 12-year deals priced at G+102bp and G+107bp, respectively.

US market take up the slack again

The ISM US non-manufacturing PMI for September came in at a very strong 59.8, trouncing forecasts of 55.5. That service sector growth for September was the highest in 12 years. So a tentative (weaker) start to US stocks was reversed a little. European equities came off their sessions lows, the DAX rose, rate markets were slightly better offered. US equities were trading mixed in a tight range through the early part of the session, following that super 4-day record breaking run – and managed to go into a 5th record breaking session! New record closes for the S&P, Dow and Nasdaq.

In the credit market, the indices saw protection costs rise as Spanish jitters infiltrated the synthetic markets. Better equities in Germany and the US didn’t help alleviate concerns but probably helped to stem the rise in spreads. Main was up at 56.9bp (+1.4bp) while X-Over outperformed as it only rose to 248.7bp (+1.3bp).

As for cash, the market was little moved, but perhaps a touch better offered if anything. The Markit iBoxx IG cash index closed at B+107.6bp (+0.3bp). The index has been marked with a 107bp-handle for the best part of three weeks, highlighting the lack of activity in the secondary market. Oh, well.

Finally, in high yield, it was a similar story with the market closing unchanged bereft of any meaningful newsflow on corporate names, secondary market volume and just that BayWa issue which would have been lapped up by IG accounts. For the record, the index was at B++280.5bp and is still around 3bp wider than the record tight. Maybe we will have a stab at it in today’s session?

On a housekeeping note, apologies for the recent lack of a ‘log in’ link on the site/emails.  We have been made aware of this which happened after a software update, and should be remedying this as soon as we have the update fix.  Thank you for your patience.

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.