9th May 2019

Still a game of chicken

iTraxx Main

67.3bp, +4.8bp

iTraxx X-Over

283.2bp, +16.2bp

🇩🇪 10 Yr Bund

-0.05%, -1bp

iBoxx Corp IG

B+131.6bp, +3.3bp

iBoxx Corp HY

B+433bp, +8bp

🇺🇸 10 Yr US T-Bond

2.45%, -3bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”24″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

Market vulnerabilities boost primary credit…

Just when we thought that markets ought to have been ripping higher/tighter – equity/credit spreads – they’ve come unstuck following those tweets from the President. Just about everything in terms of market direction for May and June potentially hangs on the outcome of the talks currently underway, and we can safely assume the markets will receive a running commentary on their progress. This President isn’t one for the usual protocols. That means the edginess besetting the markets this week is unlikely going to fade and we will stay vulnerable to further weakness.

In credit, investors will just remain sidelined in secondary but primary, which was very light over the past 3 weeks – and prior to this week’s tweet storm, was much less gloomy in the session. That ought not to have been the case as lower levels of confidence might have kept borrowers sidelined. But no. We were spewing out (IG non-financials and other) deals leaving us with the sense that borrowers were getting deals away before markets deteriorated more! Furthermore, there’s obviously much more business to get done judging by the swathe of mandates announced in the past couple of sessions.

So the receptivity to deals shows that credit investors remain extremely willing to support primary. Much of that is borne out of necessity with their cash balances needing to get absorbed. However, we will move wider for choice in spreads but there will be no sense of investors being overly concerned with moderately weakening valuations. And that includes primary deals which do not necessarily break tighter when free to trade.

Primary re-lights the fire

Transurban Finance was first to price, with €600m clipped in a 10-year maturity costing midswaps+100bp having garnered a near €2bn book, and final pricing was 20bp inside the opening talk.

Next up was Coca-Cola HBC which printed a dual-tranche transaction for a combined €1.3bn. The 8-year, €700m transaction was priced at midswaps+75bp and the 12-year offering came at midswaps+102bp. The borrower lopped 23-25bp off the initial price talk made possible with demand upwards of €4.7bn.

Spanish oil group Cespa took €500m in a long 5-year priced at midswaps+95bp which was 30bp inside the opening talk with books up at over €2.2bn. Eaton Corp – a US power-equipment maker – was present in a dual-tranche deal. They issued €600m in a 2-year deal at midswaps+23bp and €500m in a 6-year at midswaps+60bp, with the final pricing some 20-22bp inside the initial price talk. Finally, Adecco took a sub-benchmark €300m in a 10-year at midswaps+80bp (-15bp versus IPT).

It was the busiest day in weeks. Just €5.3bn of IG non-financial debt was issued prior to Thursday’s deal flow – in the 3 weeks since Sika Capital’s deals on April 15th. €3.7bn alone was printed in the session and for the year to date, we passed the €100bn mark, now at €103.6bn for 2019.

Elsewhere, we had Ireland issue €4bn in a long 30-year at midswaps+47bp (books at €18bn), the Philippines printed €750m in an 8-year at midswaps+70bp (-20bp versus IPT), while in the sterling market, Denmark’s Orsted group sold three green bonds for a combined £900m in 8, 14- and a 15-year CPI-linked maturity tranches.

In the high yield market, Vodafone Ziggo was busy tapping its 4.625% 2025 issue for €550m. Summer Bidco and United Group are likely pricing deals on Friday.

Could be worse, might still be

Equities moved smartly lower – but that was always going to be the case given the sea of red across screens in Asia overnight. Losses accelerated into the afternoon session, the Dax giving up 1.65%, the FTSE 0.9% with other European bourses up to 2% down in the session. The US equity market opened in the red and indices were lower by well over 1% during the morning session, but recovering to around 0.5% lower (S&P), as at the time of writing.

Rates were in the ascendancy. Trade jitters promoting a broad market safety trade pushed government bond prices higher. The 10-year Gilt yield declined to 1.11% (-3bp), the equivalent Bund yield fell just a touch to -0.05% (-2bp) and Treasuries were better bid, too. The 10-year yield also declined but was off the lows at 2.45% (-3bp).

For Bunds, that is a 10bp drop in the 10-year yield in a week highlighting the nervousness surrounding those trade talks. Of course, prior to last weekend, the markets chose to look on the bright side allowing the US equity markets to hit record highs and Bund yields in the 10-year, for example, back into positive territory.

Overall, it ought to have put a lid on primary activity (it clearly didn’t) as confidence should have drained away from credit markets. It was a very busy session. Secondary spreads weakness was apparent though into the broadly risk-off tone.

In the synthetic market, protection costs rose sharply, leaving iTraxx Main better bid at 67.3bp after a massive rise of 4.8bp in the session. X-Over rose by 16.2bp to 283.2bp. Ouch.

As for cash, yuck here too for a change. The weakness saw to it that the iBoxx IG cash index was 3.3bp at the close, and 10bp wider this month so far. The firmness of the underlying kept returns for the asset class at 3.9% year to date.

The weakness was clearly seen in the high yield market as well, where the iBoxx index closed 8bp wider, thus recording a 35bp reversal in the index this month so far. Returns year to date have edged lower, to 5.6%.

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.