22nd September 2018

Some defiance at last!

iTraxx Main

68.3bp, +0.4bp

iTraxx X-Over

264.6bp, -1.5bp

🇩🇪 10 Yr Bund

0.46%, -2bp

iBoxx Corp IG

B+129.4bp, -0.5bp

iBoxx Corp HY

B+379.7bp, +0.4bp

🇺🇸 10 Yr US T-Bond

3.07%, unchanged

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”18″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”20″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”22″]

20-30bp is the new 10-15bp…

That was a good second half of the week and gives us a platform to rescue performance as we close in on the end of this month. Fresh record-high stocks in the US were the principal take away, but we in the corporate bond markets will be feeling relieved that the supply situation has perked up. And the information ratio we have managed to obtain as a result will have us in better spirits as we enter the final quarter of 2018. The markets might have had a super week, but the macro outlook – away from the US – remains difficult and isn’t showing signs of stabilising.

There is continued weakness across the Eurozone as trade tariffs start to bite, global demand is weakening at the same time, the Brexit debate isn’t helping anyone and the geopolitical scene remains stressed (more sanctions against Russia last week, for example). There might a level of complacency in the markets although we would think that a largely self-sufficient US will ride out much of the storm. It has oil, a diverse & well-served large economy domestically and is growing at 4% or so with little sign of overheating just as the Fed becomes a little more hawkish.

For the moment, other markets are being dragged higher in the US’ slipstream, but that might not necessarily be warranted or justified. The end of last week had Eurozone data suggesting a weaker export performance from the region, while German manufacturing PMIs dropped to a 2-year low in September with similar weakness in France.

One market where improved valuations might be justified is the corporate bond market. Nothing has fundamentally changed, but we have massively supportive technicals and a squeeze in spreads on the back of it. Large investor cash positions built up over the past 6 months on fears of a broader blowout (Turkey, US/China, Italy) has failed to materialise. That elevated level of cash needs a home and we are seeing books massively oversubscribed as investors look to get bonds on board.

On the follow, 20-30bp of tightening in final pricing of deals versus the initial guidance is beginning to become a little more commonplace. It begs the question as to why syndicates are still sticking with IPTs so cheap, as we have a dynamic market and should be adjusting to market conditions? So much for Mifid 2/transparency. And further, why do investors accept this situation – but also accept tightening guidance even if the book size doesn’t justify it? Fear of not being in the deal – and greed.

That tightening dynamic in new deal pricing might not be sustained. We’ve had almost €24bn of issuance this month, but soon those cash positions won’t be as bloated and it will be harder to justify tightening the final pricing of deals by so much. Indigestion will set in. For now though, the going is good, and BT’s drive-by deal on Friday via dual tranche €1bn offering played into the 20-30bp dynamic.

So the information ratio is that we don’t quite have enough supply, demand is huge and looks sustainable for the moment, new deals are receiving attention aplenty while all combined with a short-Street faced with reluctant sellers, we are going to see credit spreads grind tighter.

Primary market working hard, more needed

At the back end of last week, we had British Telecom come through with a drive-by deal for €1bn split equally between a 5-year tranche and 10-year offering. And no prizes were being dished out for those who guessed a massively oversubscribed book. The 5-year deal was priced at midswaps+65bp (-20bp versus IPT) and the 10-year tranche at midswaps+120bp (-25bp) with books of €1.75bn and €4.25bn, respectively.

The transaction takes the total of IG non-financial issuance for the month to €23.6bn. We had forecast anywhere in the region of between €30-40bn for the full month and were looking for the total to need to get closer the upper end of that range in order to address the issue of poor levels of supply this year. There’s a good chance that we get somewhere int he €30-35bn area.

For instance, the total supply in this category of issuance this year so far comes in at €167bn and this compares with €209bn for the first nine months of 2017 and €214bn in the corresponding period in 2016.

In the high yield market, Italmatch’s €410m deal was priced at Euribor+475bp for the 6NC1 issue and we also had deals priced from MCS Groupe (€120m, 6NC2, Euribor+537.5bp) and Garrett Motion (€350m, 8NC3, 5.125%).

It was a busy way to end the week in primary, with the high yield issuance now up at €4.7bn for the month and €53bn year to date. Last year’s record total of €75bn is in sight.

PM May finally shows some mettle

It just got interesting! We finally had the defiant speech many were looking for from Prime Minister May on Friday following the Salzburg EU meeting. Sterling took a major tumble as she indicated that talks had reached an ‘impasse’.

UK stocks looked cheaper and the FTSE zoomed higher by 1.7%. A dash for safety helped Gilts rally and the 10-year yield dropped 4bp to 1.54% as Bund yields in the same maturity fell 2bp to 0.46%. It was a dramatic final afternoon of the week. Unconnected but worth a mention, Bitcoin was almost 5% higher. US stocks were trading at or around record highs through the final session.

Synthetic credit didn’t do too much with Main up 0.4bp at 68.3bp and X-Over 1.5bp lower at 264.6bp, in a lacklustre session for the new Series 30 contract.

Secondary cash was in the throes of another albeit excruciating squeeze, leaving the IG iBoxx index another 0.5bp tighter at B+129.4bp – some 6.5bp tighter this month so far and almost a touch tighter in every session. The high yield market, though, closed unchanged with the iBoxx index left at B+379.7bp.

The sterling market has been rock solid stable, unmoved by the Brexit brouhaha, absorbing any issuance with aplomb, with the cash index at G+156bp – completely unchanged this month.

This week has the FOMC meeting midweek, with rates expected to rise by another 25bp come Wednesday. There’s plenty more to come on the data front with US GDP, income, spending consumer confidence and trade data keeping the markets watchful. In credit, we’re going to be looking for primary to continue with a decent flurry of deals kicking off potentially with a three-tranche effort from Abbot Laboratories.

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.