16th October 2019

Return to sender

iTraxx Main

52.5bp, -0.5bp

iTraxx X-Over

232.6bp, -4.4bp

🇩🇪 10 Yr Bund

-0.39%, +3bp

iBoxx Corp IG


iBoxx Corp HY

B+404bp, -5bp

🇺🇸 10 Yr US T-Bond

1.75%, -2bp

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Write a letter to the EU?…

Eurozone inflation dropped to 3-year lows in September, highlighting the predicament that the ECB has in trying to boost a slumping economy. CPI (at 0.8%) and core CPI (at 1.0%) both year on year, are far away from the ECB’s medium-term target levels. Brexit negotiations remained on a knife-edge as the UK (and the EU) struggled to get the DUP on board with the muted deal.

And so the markets effectively came to a standstill in this midweek session. Equities didn’t do too much. Rates were bid to start then better offered later. Secondary credit was flat to better bid, while primary market activity slowed markedly. With all that going on – or not as the case might be- we will have a look at this year’s euro-denominated primary markets in this note.

First, however, it’s no exaggeration in saying that credit investors have had an excellent year. IG spreads are 50bp tighter (iBoxx index) and returns are close on 7%. HY spreads are 115bp tighter and total returns are up at 8.5%. The AT1 market has fared even better with returns up at 13.2% and spreads tighter by 241bp with the index level at B+468bp the tightest this year.

The ECB will soon be back

High beta has had a field day this year, but so have low beta markets. It is not often, for example, that IG markets pipe up with more than 5% total returns. Indeed, the Eurozone has returned 9% year to date and that is a drop versus the 10%+ in the year to end September, as rates have come under pressure of late. Still, that 9% is fantastic.

Few will quibble with those numbers or the performance – and they have come even as primary has flooded the markets with deals (see below). Usually, we would see some pressure on secondary with such high levels of issuance, but that hasn’t been the case this year. And with the ECB due to start hoovering up the IG market come November 1, the promise is that there is a little more to performance to be gained before we close out 2019.

Primary market recap

The IG non-financial markets have had an excellent year. Issuance is now up at €265.7bn and with 7 weeks of business still go, that is the fourth best year for supply in history. Another €6bn of deals (more than likely this month), takes us past the €271bn second best year (recorded in 2016). Some of the key features this year has been the Reverse Yankee deal level, the plethora of multi-tranche deals with a whole host of 3- and 4-tranche deals with the odd 5-tranche effort thrown in for good measure.

All that’s really left is for the market to print another €20bn, and we will have set a new record for supply in any given year. That’s something to look forward to in the early weeks of November.

This year, IG non-financial Reverse Yankee deals have accounted for 30.5% of the total euro-denominated volumes, falling back from a high recorded at the end of September of 32.3%. There is a good chance we can hold this level of proportionate volume and retain 30%+ for reverse yankee borrowing in the euro debt markets for 2019.

Pricing has been fairly consistent too all year, with final prices reflecting a 15-30bp tightening versus the initial guidance, as syndicates and investors play the game with their tacit understanding about what to expect. Over-subscriptions have typically been in the order of 3 – 7x with investors undeterred by the pricing shenanigans. Of course, for odd borrowers there is a case for price discovery, but not for the large part!

Senior financial issuance has also had a good year. Already the level of issuance is up at €142.6bn and in excess of the full-year totals recorded in 2017 and 2018. The €145bn issued in 2016 will be surpassed and we are likely going to see €150bn+ printed in a market which traditionally slows in December.

Senior Financials Monthly Supply

As for the high yield market, all expectations for this year have been exceeded. We had originally pitched somewhere in the order of €40-45bn for the full year’s volume. Half way through October has us up at €51bn and given the deals in pipeline, there is a good chance that we can exceed the second best year on record. That was in 2018, when €61bn was issued.

The push here might come in November, when the ECB starts lifting IG debt and squeezes investors out of that market into the high yield one. We saw that in the 2016-2018 period, and we think it is likely again. Great demand amid tightening spreads might boost the primary market.

Quieter midweek session

The deals in the session came from BPCE which issued €1bn in a long 7-year senior non-preferred at midswaps+78bp which was 17bp inside the opening guidance with books up at €2.75bn. The high yield rated Banca Farmafactoring issued €300m in a long 3-year senior preferred priced to yield 1.75%. Finally, Citigroup plumped for sterling funding, with a £650m 7-year at G+140bp (-10bp versus IPT).

As well as that poor inflation report for the Eurozone, US retail sales disappointed on all metrics for September, as they declined 0.3% month on month, against expectations of an increase of 0.3%. Some comfort was derived from the previous months upwards revision to 0.6%.

Equities were playing out in a narrow range, small up or down depending on the market. BofA beat expectations with Q3 earnings amid strong gains across most businesses.

But rates also played out in a narrow range and mixed. Gilts were unchanged in the session, the 10-year benchmark yield at 0.69%. The Bund yield pushed up to -0.39% (+3bp) with the Treasury in the same maturity was left to yield 1.75% (-2bp), at the European close.

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.