16th May 2018

Rocket Man brings us back down to earth

iTraxx Main

56.4bp, +1.2bp

iTraxx X-Over

275bp, +4.3bp

🇩🇪 10 Yr Bund

0.61%, -3bp

iBoxx Corp IG

B+108bp, +2bp

iBoxx Corp HY

B+328bp, +6bp

🇺🇸 10 Yr US T-Bond

3.09%, unchanged

🇬🇧 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″]

Pemex blooper…

Uh oh! Well, that’s that then. What a shame. And perhaps a lesson for the EU in the Brexit negotiations. There needs to be some give and take. With North Korea threatening to pull out of the denuclearisation talks with the US, having already abruptly postponed/cancelled the next scheduled meeting with the South, we’re going to need a measured response from the US.

As well as the Iranian situation, the rising tensions around the Palestinians and Israelis, we now have this third front reopening. The markets took a slightly defensive stance. We checked the sell-off in rate markets (Italy aside), equity markets in Europe stopped to have a think (higher in the US), and we ought to have expected credit to do very little.

In a way, the credit market did – with just a couple of deals on the screens early on from borrowers which might get deals away at the worst of times given the nature of the risk involved. Secondary was weaker, though. Then we had Mexico’s oil giant Pemex pop up with a 4-tranche deal. The ongoing Nafta talks are due to conclude on Thursday (likely without an agreement), but we don’t believe this will have an impact on the success of this deal, although any negative sentiment might have affected pricing with the borrower being a price taker.

Anyway, the deal hit the screens with IPTs needing to be corrected – higher. We would think that the leads forgot to add in the 20bp of an additional ‘suckers’ premium. The new deal pricing dynamic is a game after all!

Deals are what matter for investors with individual event risk fairly limited and there has been little for us to be concerned about in that sense for a considerable period. Credit secondary has been as dull as dishwater for as long as we care to remember, dumbed down and exhibiting a market homogeneity across the rating spectrums, created by the ECB’s financial crisis policy response.

We’re still far away from trading off relative value terms, with technicals out of sync as secondary market illiquidity renders switch trades impossible or very difficult – unless one gets lucky. The market generally has been severely distorted too by the ECB’s huge €153bn, 100-week corporate bond grabfest, which is ongoing. We’re sure the ECB meant good, but they haven’t really helped, given that rock-bottom funding levels would have been available without the central bank’s direct intervention in the credit market. And the high yield market would still have developed.

We’ve hit a bit of a brick wall. Credit hasn’t done much this year with spreads a little wider (less than 10bp in IG/iBoxx cash index), and total returns around zero to -0.4% (IG and HY). We’ve been at the mercy of rate markets as far as the latter is concerned while we’re scratching our heads as to why spreads are not tighter – given the relative lack of supply, with still considerable demand (sidelined cash looking) for corporate bonds. Not that we would think that to be the case, with spreads weaker again in the session.

Pemex giveth and taketh away

Subordinated bank issuance came from BFCM’s 10-year Tier 2 issue priced at midswaps+145bp. The senior issuance came from Santander Consumer Finance which issued €500m in a 5-year at midswaps+50bp. That was followed by Morgan Stanley’s 3NC2 floater at Euribor+40bp for €1.25bn.

In non-financial corporates, US pharma concern Mylan Inc became the third US borrower in the euro-denominated debt markets this week after United Tech and American Tower. They came in for 7-year funding of €500m at midswaps+143bp which was 17bp inside the opening talk.

However, it was Pemex who dominated. The details had them print €600m in a 4.5 year maturity at midswaps+220bp, €650m in a 5.25 year floater at Euribor+240bp, another €650m in a 7.5 year fixed deal at midswaps+288bp and €1.25bn in a 10.75-year offering priced at midswaps+370bp. The total proceeds were €3.15bn off a book of around €5.25bn. And it looks like the extra 20bp ‘correction’ added on to the price talk – was duly taken away.

That’s €14.75bn for the week so far, and we’re now up at €19.6bn for the month to date from IG non-financials.

Nervy markets are back

As for Italy, word that any new coalition government was potentially looking for €250bn of debt relief led to a sell-off in BTPs pushing the 10-year yield 15bp higher to 2.12%. We’d think that the move is still a ‘measured’ response and as not yet seen as a rout. It could become one soon, though. But should those leaked ‘demands’ be watered down – or not even materialise in reality, then a snap back in BTP prices (yields lower) will be hard and fast.

Elsewhere, Eurozone inflation weakened. CPI dropped in April to 1.2% from 1.3% in March while core inflation fell 0.3% to 0.7% which was in line with expectations. Higher oil prices are the big hope for rising inflation in the coming months. The euro came under some fire as a result (with the Italian situation also not helping). In all, we saw a better bid for government bonds emerge as the session progressed leaving the 10-year Bund yield lower at 0.61% (-3bp), with more a lesser moves for Gilts (10-year at 1.50%, -1bp) with US Treasuries unchanged at 3.09% (at the time of writing).

The nerves around Italy and North Korea filtered through into the synthetic credit markets and we had iTraxx Main up at 56.4bp (+1.2bp) at the close, with X-over protection rising to 275bp (+4.3bp). Finally, in cash we are failing to slip through the cracks. The IG index was 2bp wider at B+108bp, reflecting a large move not helped by weakness around higher beta corporates. In high yield, we also moved wider (no surprise) and the index ended up at B+328bp (+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.