13th March 2018

Rollercoaster ride continues

iTraxx Main

49.0bp, +0.3bp

iTraxx X-Over

250.3bp, +2.2bp

10 Yr Bund

0.62%, -1bp

iBoxx Corp IG

B+92.3bp, +0.8bp

iBoxx Corp HY

B+305.4bp, +1.7bp

10 Yr US T-Bond

2.86%, -1bp

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=”10″], [wp_live_scraper id=”11″]

Hybrids steal the show…

We needed IG non-financial deals, and we got them, finally! Several were higher-yielding in nature and served up a treat for investors, starved of primary activity of late in the non-financial corporate bond market. The plaudits will go to Telefonica for its dual tranche hybrid transaction, but Caixabank’s contingent convertible transaction will have run it close in terms of investor interest. It’s all a good sign that we might just be set up for a splurge of action that will make the issuance levels for this quarter appear much more respectable and offer some relief to a starved investor community.

The first port of call at the start of business on any day is how the equity markets are shaping up. They didn’t fill us with dread or excitement on Tuesday, but the uncertain start was suggestive of yet another fairly laborious session ahead. Which was pretty much what happened.

In credit, though, there were deals. The UK markets were quite ahead of the Chancellor’s Spring Statement, while the previous day’s mixed close in the US wasn’t going to see any rip higher in stocks in Europe. So risk valuations traded in a narrow range through the opening part of the session before they faded into negative territory. At least the corporate bond market (for once) was in the ascendancy with that deal flow.

The macro news in the day was centred squarely on the US inflation report with headline and core CPI due – and the markets pondering whether the US would squeeze in a fourth interest rate rise, instead of the three envisaged/priced-in this year. In the event, the key core rate was unchanged in February versus that of January at 1.8% and in line with market expectations. The headline rate rose to 0.2% in February month-on-month, in line with expectations, but down from 0.5% in the previous month. So the numbers all came in line with expectations, and we think the markets will be looking for just three rate hikes (of 0.25% each) this year.

As primary credit has its day

The IG non-financial deals had Orange SA take €1bn in 10-year funding at midswaps+35bp with the €2bn of interest enabling the leads to reduce the final pricing by 15bp. Staying with French-based borrowers, Cie de Saint Gobain took €750m in an 8-year maturity priced 18bp inside the opening guidance, off books at over €2bn. Next up was WPP with a dual tranche combined €750m. That came in the form of a 4-year €250m floater at Euribor+45bp (-15bp versus IPT) and a 7-year fixed offering at midswaps+70bp (-10bp versus IPT).

Approaching the halfway stage for the month, IG issuance now sits at €9.15bn, although the Telefonica deal (below) will have met with mostly IG players.

Big €1.25bn deal for the Spanish multinational broadband and telecommunications provider

That’s because the Telefonica’s deals will be rated sub-investment grade (Ba2/BB+/BB+), whereas the borrower’s senior rating is Baa3/BBB/BBB). Anyway, Telefonica issued €1.25bn in a PerpNC5.7 structure at 3.00% (-2bp versus IPT) and €1bn in a PerpNC8.5 offering at 3.875% (-37.5bp versus IPT) off combined books of €5bn. In a cash/debt management exercise, the use of proceeds were to repurchase costlier hybrid (Sept. 18 call) and other debt. The deals took the HY rated issuance for the month to €6.7bn.

In the banking space, DNB Bank came up with €600m in a 10NC5 Tier 2 structure priced at midswaps+77bp (-13bp versus IPT) on books of €1.3bn. And staying in the subordinated debt sector, we had that Caixabank deal. They plumped for an AT1 structure for €1.25bn in a perpNC8 format to yield 5.25% off a €3.5bn book (-25bp versus IPT).

The senior issuance was ticking over too, with ANZ New Zealand printing €500m in a 7-year at midswaps+40bp, and Arion Bank was in for €300m in a 5-year at midswaps+65bp.

Tillerson, morons and some market weakness

The UK’s Chancellor announced that the independent Office for Budget Responsibility had lifted its 2018 growth forecasts to 1.5% (from 1.4% previously), while keeping 2019/2020 forecasts unchanged at 1.3%. The public sector borrowing requirement was trimmed to 2.2% of GDP in fiscal 2017-18, to 1.8% in 2018-2019 and down to 0.9% in 2022-2023. It was an upbeat statement that he gave to the House.

The inflations data was also greeted well, but the mood was sullied by the extraordinary news that President Trump had sacked his Secretary of State, Rex Tillerson. The relationship between Trump and Tillerson had long been strained, and overnight, Tillerson talked off-message on the Russian state’s involvement in the Salisbury nerve gas poisoning – with his support firmly behind the UK’s stance.

Hopes that the focus would be on the inflation report and that the US would trade into those higher futures with equities sharply higher soon faded, and we played out mixed and flattish.

In Europe, the Dax was the chief underperformer, off by almost 2% before halving those losses to close 1% down. The FTSE closed 1.0% lower. As for rate markets, they spent the session better bid for choice (yields lower) and support only rose as equities came under pressure. The yield on the 10-year Treasury was therefore at 2.86% (-1bp), the equivalent maturity Bund closed to yield 0.62% (-1bp) and the Gilt yield was at 1.49% (-1bp).

In credit, focus was on the new deals. However, weaker equities saw to it that we had some of the recent gains in protection costs slip into reverse gear. Still, it wasn’t as bad as we might have feared given the weakness in equities. iTraxx Main therefore was up at 49.0bp (+0.3bp) and X-Over up just 2.2bp at 250.3bp.

As for cash, a very limited session for volumes and turnover was par for the course, but we were pleasantly distracted by the primary issues. We closed with the Markit iBoxx IG cash index at B+92.3bp (+0.7bp) and the high yield index 1.7bp higher at B+305.4bp.

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.