9th February 2017

Desperately seeking clarity

FTSE 100
7,189, +3
11,543, -6
S&P 500
2,295, +2
iTraxx Main
75bp, -1bp
iTraxx X-Over Index
303bp, -1bp
10 Yr Bund
0.29%, -7bp
iBoxx Corp IG
B+137.6bp, +2bp 
iBoxx Corp HY Index
B+383.7bp, +6bp
10 Yr US T-Bond
2.34%, -5bp

Battening down the hatches?…

Catalyst: Unilever’s €1.2bn via a 2-tranche deal

Ryanair and Unilever finally gave corporate bond investors something to do. Starved of supply of late, and unwilling to participate in the secondary market, the deals from these two borrowers (even if only for a combined €1.95bn) were a welcome relief as well as a distraction from the daily news flow around Trump, French elections, Brexit negotiations and Greece’s impending fall again from grace.

The European earnings flow saw mixed results and we had nothing new to chew on, with the aforementioned events allowing the markets to move in limited ranges throughout – although perhaps with a defensive bias if anything.

So, the 10-year Bund/OAT spread compressed to around 71bp after a late rally in OATs (10-year yield down at 1.00%, -13bp), but we seemingly have a new level in which to trade off  (a couple of the “wrong polls” and we could be north of 100bp, we think).

Safe-haven risk was better supported with Gilt yields down at 1.22% (10-year, -7bp), while the Bund was also lower at 0.29% (-7bp) having been up at 0.50% a few weeks ago. The 10-year Treasury is at 2.34% (-5bp) and this despite the promise of fiscal profligacy to come, although we need to offset that with event-risk support for the ultimate risk-free asset (and there’s much potential for event risk!).

The secondary market was wider again (more later on this) and that in itself is becoming some cause for concern.

After all, if (1) a lack of issuance, (2) the ECB’s interest and (3) a still massive demand for corporate risk from other investors awash with cash all fail to promote spread tightening, where is the market’s upside going to come from? Even a good rally in equities or a drop in government bond yields fails to see the Street tighten up the market.

Still, at least the synthetic indices are behaving as they should – by reacting to the ebb and flow of the news flow and equity markets (and for now, that means the cost of protection is rising).

Credit beginning to feel a little hot under the collar…

Corporate spreads continued to move wider and the Markit iBoxx IG corporate cash index is now up at B+137.6bp, after widening 2bp in yesterday’s session. That’s 3.5bp wider YTD. However, we’re not displaying the volatility that at times afflicts the equity and government bond markets, while perhaps we ought to be grateful that is the case. There is a lot of head scratching going on though.

It’s as if we are waiting for the rules to change and a reason to emerge for a major move in either direction. At the moment, that can only come when credit fund managers receive those “large” redemption requests. This isn’t happening for a while – as we discussed in an earlier note. Everything else suggests we ought to be going tighter.

Amid the macro/geopolitical uncertainties, credit market participants are just gritting their teeth and grinding “it” out. Risk-takers some might be, but there is a very conservative strategy being played out right now. That suggests most portfolio managers are following rules to the letter – as laid down by their guidelines of the fund – and so are hugging their index and re-investing cash as and when, selecting the “best value” at any particular moment in time (that is, the new issue market).

Sterling markets also saw spreads edge wider, the index left at G+153bp (+0.75bp), but the rally in Gilt markets saw to it that returns have staged a major recovery in just a week. Having been down at -0.9% in performance at the end of January, this market is now back in the black and up by 0.1% YTD!

Finally, secondary high yield also exhibited weakness with the index closing at B+384bp (+6bp). We don’t blame the supply for that, but rather just the general aversion to risk.

Primary wakes up

Long haul: A six year transaction from Ryanair was the day’s biggest tranche at €750m

In primary, Unilever collected €1.2bn through a 2-tranche deal with 6-year and 10-year maturities and managed to lop 15-20bp off the initial price guidance, while Ryanair issued €750m in a long 6-year transaction and 13bp inside the opening guidance.

The total so far for the month, for IG non-financial issuance stands at a fairly unspectacular €3,550m. China Construction Bank issued €500m of senior debt and ING lifted €750m in a 12NC7 Tier 2 deal.

The new issue sector was busier in high yield, too, as ContourGlobal Power reopened their 2021 deal for an upsized €100m tap. Silgan Holdings printed a €200m increased final sized deal for €650m, as well as a $300m tranches both in 8NC3 format.

The euro-denominated deals took the monthly tally to €1.2bn for HY issuance. Other deals included €4.5bn from Finland, €1bn from Madrid and several covered bond issues.

As for the synthetic indices, we saw them close tighter and off the earlier 2017 wides with Main at 75bp (-1bp) and X-Over at 303bp (-1bp).

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.