25th January 2017

That’s that, then

FTSE 100
7,150, -1
11,595, +49
S&P 500
2,280, +15
iTraxx Main
69.7bp, -1bp
iTraxx X-Over Index
289bp, -3bp
10 Yr Bund
0.40%, +4bp
iBoxx Corp IG
B+134bp, -0.25bp 
iBoxx Corp HY Index
B+381bp, -2bp
10 Yr US T-Bond
2.46%, +6bp

Zzzz….Supreme Court rules, let’s get on with it…

Parliament power won’t change the Brexit decision, but will likely delay the triggering of Article 50

It was always going to be a light session around the UK Brexit Supreme Court ruling. In the event, the Justices decided that Parliament has to have a final say on any deal, so we get a new Act for MPs to vote on – and then get on with the business of leaving the EU.

There was plenty of issuance – but not from borrowers we would think interested corporate bond investors. SSAs ruled.

France (€7bn), Spain (€9bn), UK (£4.5bn) and even Egypt was chipping in to lead the sovereign issuance, although “credit markets proper” had an EDP issue and a dual tranche transaction from Imperial Brands to keep them occupied.

The economic data was excellent from the Eurozone. Manufacturing PMIs suggested that activity is currently as buoyant as for many a year. There’s much optimism within industry amid the weaker euro and improving order books. Hiring is improving too. This could be a turning point. Even the UK reported that it borrowed less than expected last year. And President Trump was making good on his pre-election promises, busy signing away executive orders on various projects and the like.

The major downside in the session was that British Telecom delivered a shocker – and the market was completely unforgiving. Accounting issues in its Italian business and lower public spending saw the group issue a profits warning. The equity markets were damning as its stock fell a record 21% in the session!

The warning wasn’t really a credit-defining event, and the group’s bonds and CDS were mainly unchanged. Still, we think that equity price looks like a huge bounce might be in the offing.

Corporate issuance slows

Imperial Brands owns several companies including Imperial Tobacco and Logista

We had deals, but just two borrowers in IG non-financials on a day which was dominated by UK politics. EDP issued a long 6-year maturity €600m on books of €2.2bn some 17bp inside the opening guidance.

Imperial Brands followed with a dual tranche deal for a combined €1bn with both tranches (4.5-years and 8-years) eventually priced 15-20bp inside the initial talk.

The combined €1.6bn of offerings took the total issuance for non-financials in investment grade corporate bonds to €24.6bn so far for the month, and €5.1bn for this week, after adding in that €3.5bn from Deutsche Telekom on Monday. There were a couple of senior bank deals too, a sizeable €2bn from Wells Fargo and €500m from NIBC bank.

Admittedly, the story wasn’t really about the corporate bond market, it was focused heavily on that trio of issues from France, Spain and the UK.

Light session fades into the memory

There was no shortage of interest for those government bond issues, with record demand for some of the deals. The UK, for example, had no problem selling the £4.5bn Gilt issue which elicited over £23bn of orders. The back-up in yields in a mixed session was small while equities managed to end in the black – and a little unconvincingly.

So, 10-year Gilt yields rose to 1.40% (+3bp), we had the equivalent maturity Bund yielding o.41% into the close (+5bp) while Treasuries gave some back leaving the yield on the 10-year at 2.46% (+6bp). The FTSE was alone in the red (barely, admittedly), while other bourses rose by up to 0.4%. The S&P accelerated after our close while the NASDAQ was at a record high.

In the secondary corporate bond market, spreads inched better such that the Markit iBoxx IG index was at B+134bp (-0.25bp). At that level, the index is just 0.5bp tighter so far this year while the index yield is 10bp higher at 1.27% and returns are just in the red (around -0.2%). The sterling IG index is 3bp tighter in the same period although returns are running deeper in the red owing to the weaker performance in Gilts versus Bunds.

The high yield market was a touch better, reversing most of the previous day’s losses and the index left at B+381bp (-2bp). This index is 32bp tighter already this year, clearly benefiting from the hope that macro’s improvement is sustainable which will benefit this asset class. Finally, in synthetic land, the iTraxx Main index was lower at 69.7bp (-0.8bp) and X-Over at 289bp (-3bp).

That’s it. Have a good day. Back tomorrow.

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.