25th September 2019

🗞️ Relax, it’s just a stumble

iTraxx Main

55bp, -+xxbp

iTraxx X-Over

230.9bp, +7.6bp

🇩🇪 10 Yr Bund

-0.59%, +1bp

iBoxx Corp IG

B+124.5bp, +0.5bp

iBoxx Corp HY

B+413bp, +8bp

🇺🇸 10 Yr US T-Bond

1.71%, +7bp

🇬🇧 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″]

Mild disruption fails to sully Q3 for corporate bond market…

Impeachment proceedings against President Trump and uncertainty around Brexit were enough to effectively write off Wednesday’s session. The brouhaha around both situations left the markets to warrant their customary defensive stance amid the potential for chaos. It doesn’t help that Trump suggests stock markets would crash if he is impeached (some sort of desperate threat from him) while we have little real idea how the next few weeks will play out on the Brexit front. Primary credit was still chugging along, though – albeit at a slower pace versus the opening three weeks of the month, with several deals to keep us interested.

Either way, we’re not envisaging any financial catastrophe, but the headline risks around those political situations allied with the obvious weakness in global macro suggest that risk markets (namely equities) might struggle to gain much traction from these levels.

Thankfully (?) in credit and Eurozone rates, we have the ECB embarking on its QE programme and that is going to prop up fixed income markets. It’s a theme we’ve fleshed out on many occasions, but after an assault on -0.50% last week, the 10-year benchmark is back heading for -0.75% (and beyond in our view). The temporary pullback everywhere else is also now being corrected, or will be. Spanish 10-year yields were back in single-digit territory earlier in the day, just as Italian BTPs in the same maturity closed in on record lows again.

And we believe that credit is easily well-positioned to benefit from the support for the underlying as it rallies, with asset allocator adding greater levels of corporate bond risk as they seek those higher yielding fixed income assets. We’re in a repeat of the dynamic which filtered through the corporate bond market in the 2016/2017 period when the first corporate bond market purchase programme commenced.

IG spreads have already rallied 50bp this year to B+124bp (iBoxx index) and the HY index by 120bp to B+405bp. We think that the former has another possible 20bp to go this year and the latter by 50-60bp.

Sterling primary leads the way

Thermo Fisher added a huge chunk to the IG non-financial deal flow this week, but it has been a relatively subdued one in comparison to what passed before. We’ve had ‘just’ €4.4bn against a massive €18.9bn in the opening week of September with €9.4bn and €15.4bn in subsequent weeks.

BMW: Sterling deal

After a spate of sterling deals already the week, we had another slew in Wednesday’s session. Be it arbitrage-related versus euro debt pricing, or getting sterling funds in ahead an uncertain October, the deals are flowing. BMW was the IG non-financial borrower, lifting £250m in a 5-year maturity at G+110bp (-5bp versus IPT), off books at just £300m. There was an extremely juicy subordinated Tier 2 issue from Just Group, offering up an 8.125% coupon for £125m in a 10-year deal.

BFCM issued £250m of senior non-preferred 7-year debt at G+125bp. OKB added £100m to its 2022 issue through a G+39bp priced tap. We end the sterling round-up with Credit Agricole’s £300m 5-year senior preferred offering costing G+100bp (-10bp versus IPT, books £600m).

As for the euro markets, real estate group Vonovia came in with a 3-tranche transaction for a combined €1.5bn, in its second visit this month. The tranches were split equally between 3.5-year, 8-year and 20-year issues at midswaps+60bp, midswaps+105bp and midswaps+160bp, respectively. Books exceeded €7bn and final pricing 10bp – 40bp across the tranches, with more at the front end. The other deal of note was Kazakhstan’s combined €1.15bn dual-tranche 7-year (yield 0.6%) and 15-year (yield 1.5%) offering.

Alas, IG non-financials delivered a zero, but IG investors would have registered interest in the highly anticipated Infineon hybrid, which was rated high double-B. The issuer took €600m in a PNC5.5 offering costing 3% and a PNC8.5 €600m priced to yield 3.75%. Also in the euro high yield market, LHMC Finco 2 priced €400m in a 6NC1.5 PIK Toggle structure to yield 7.25%.

Jittery markets

Once again, European equities headed lower and, at their worst, by up to 1.5% (CAC), the Dax off by 1.3% and the FTSE by 0.5%, before staging a bit of a comeback. They managed to finish off those earlier lows – and in most cases by less than 1% down for the day.

US markets were treading water and/or in the red – for much of the early part of the season, but there were obvious nerves as the Ukraine transcripts were released. With nothing conclusive though in the transcripts, US stocks also managed to recover to trade up, as at the time of writing.

Rates were better bid for most of the session but managed to fade the better bid. The Bund yield in the 10-year benchmark edged to -0.59% (+1bp), the 10-year Treasury yield moved 7bp higher to 1.71% while the machinations in UK politics gave the Gilt market a better bid, and the 10-year here left to yield 0.52% (unchanged).

Corporate news of the day centred on the hugely ambitious and proposed Altria-Philip Morris $200bn merger. It happened to fall by the wayside.

In credit, index closed with iTraxx Main a touch higher again at 55.6bp (+0.6bp) with X-Over underperforming as it rose almost 8bp to 230.9bp.

In the cash market, we closed flattish again in IG, the iBoxx index left at B+124.5bp (+0.5bp). The AT1 market moved B+499bp (+10bp) after remaining unchanged for several previous sessions while the HY index also moved wider, by 8bp to B+413bp.

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.