26th September 2018

Telephone numbers

iTraxx Main

67.5bp, -2bp

iTraxx X-Over

268.5bp, -2.7bp

🇩🇪 10 Yr Bund

0.53%, -1bp

iBoxx Corp IG

B+129.4bp, unchanged

iBoxx Corp HY

B+375.7bp, +1.3bp

🇺🇸 10 Yr US T-Bond

3.09%, -1bp

🇬🇧 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″]

Credits’ September love-in…

It’s going as swimmingly as can be for the corporate bond market right now. It’s been a while since we have managed to trade through a period so well. We have new issues aplenty going some way towards satiating the need for cash-rich corporate bond investor portfolio investors to get their booty invested before year-end. There is an understanding that deals are going to be priced cheaply at the initial phase of the marketing, and then rammed tighter into the final pricing. Few are being deterred.

New deals are performing well in most cases on the break. And secondary is better bid for choice. The puzzle, for now, has been solved.

And the reason is simple. Investors and the Street misread the market. As we suggested in a previous comment, risk positions were reduced at the end of Q1 and into Q2 on the back of rising tensions and fears around the US tariffs, the formation of the new Italian government and their intentions, then Turkey was thrown into the melting just as US rates go higher and refinancing risks for EM borrowers exposed to dollar financing rise. There was supposed to be trouble ahead.

So we saw investors reduce risk, build some cash buffers, wait for some sort of panic selling and/or a reset in primary levels and start adding at those wider levels. That’s not quite how it worked out as the April – August period yielded below-average levels of issuance. Few have panicked in secondary credit though even as spreads had consistently drifted wider during that period.

At the end of that period, and post-summer, investors are left considerably long cash and borrowers are feeding the needy.

It will all come to an end, but the timing of it is uncertain. That is, at some stage, the market will experience a bit of indigestion. There will be the usual ‘deal too far’. The one that comes just as we reach some sort of peak supply and pricing becomes a little testier – and investors push back. That deal will be pulled, repriced or just perform extremely poorly.

It could come sooner than one thinks!

Vodafone in the limelight

As for Wednesday’s session, the decks were cleared for Vodafone. There were several other deals in the market, but this borrower had little by way of competition and focus in this well-telegraphed, chunky offering.

The telecoms behemoth didn’t disappoint as it hit the market with a multi-currency hybrid deal (rated low triple-B) to help with the acquisition financing of the $18bn Liberty Global deal.

In detail, Vodafone went out with an increased €2bn in a 60NC5.2 to yield 3.125% (-25bp versus IPT). That was followed by a €500m 60NC10 structure yielding 4.20% (-42.5bp versus IPT). Order books for the deals were at a combined €4bn. The dollar deal was for an increased $1.3bn costing 6.25% in a 60NC6 maturity generating orders for €2.25bn (and -25bp versus IPT). As for the sterling effort, the group raised an increased £500m in a 60NC7 structure priced to yield 4.875% (-37.5bp versus IPT off an order book of £1.2bn).

The Vodafone deals takes the IG non-financial issuance for the month so far to €33.3bn – with three trading sessions to go.

As we close out the month, we can see from the chart below that French borrowers have been in the ascendancy (as have US borrowers as reverse yankee issuance took a leg higher). In September, French borrowers have taken a 34% market share of the non-financial issuance, followed by US corporates (17.5%) and then the UK (10.5%) and Italian issuers (8.1%). For the year to date, US borrowers are responsible for 12.3% of the total supply, according to our data, versus 16% in 2017.

September 2018 IG issuance by country

September 2018 - click for deals info

In the high yield market, Guala Closures SpA priced €455m in a 5.5NC1 at Euribor+350bp and we had Getlink print an increased €550m in a 5NC2 green bond structure at 3.625%.

That €1.05bn of high yield deals being priced in the session took the monthly total for HY issuance just past the €5.5bn mark and the annual level to €53.95bn. That is now just €21.1bn short of the record for any year, which was actually achieved last year (€75bn). There is plenty in the pipeline (James Hardie Industries on Thursday) and so it is likely that we will see a fresh record this year.

Prudential Plc was also busy offering T2 deals in both sterling and dollar markets. The former included 33NC13 (£750m, G+400bp) and 50NC30 (£500m, G+430bp) structures and the latter a $500m, 30NC10 offering.

FOMC decision day leaves markets treading water

The market otherwise was doing little ahead of that US rate decision. The Fed raised rates by 25bp as expected. There is 25bp more to go before year-end and it looks like a hawkish Fed is going for it in 2019, despite the non-trivial probability of Trump throwing his toys out of the pram. Anyway, for now, no damage done.

We ought to have an eye also on German politics after Angela Merkel lost a key vote in her party to install her choice of the CDU’s parliamentary group leader. It is seen by many as the beginning of the end of her reign – although it won’t come quickly.

European equities closed the session trading out in a very limited range and barely moved through it, although eventually better bid into the close.

Rates were also better bid if anything and allowed the 10-year Gilt yield to drop a touch to 1.60% (-3bp), the equivalent maturity Bund yield dropped to 0.51% (-3bp) while US Treasuries were yielding 3.08% (-2bp).

In the synthetic credit indices, iTraxx Main was the outperformer as it closed 2bp lower at 67.5bp as the X-Over index moved at 268.5bp (-2.7bp).

In the cash market, secondary was quiet and closed unchanged for the second day in succession, leaving the IG iBoxx index at B+129.4bp. the high yield market also closed unchanged, the index at B+375.7bp in a lacklustre session for secondary cash.

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.