19th January 2017

The calm after the storm

FTSE 100
7,248, +27
11,599, +59
S&P 500
2,272, +4
iTraxx Main
69bp, unchanged
iTraxx X-Over Index
289bp, -1bp
10 Yr Bund
0.35%, +3bp
iBoxx Corp IG
B+136bp, -0.5bp 
iBoxx Corp HY Index
B+389.5bp, -3.5bp
10 Yr US T-Bond
2.42%, +9bp

But waiting for the aftershocks…

The recent excitement in the markets came on the back of PM Theresa May’s Brexit speech, nervousness around Trump’s impending Presidential nuptials, a buoyant corporate bond market and an investor base seemingly ripped off by an overly excitable syndicate pricing system designed to feel vindicated by ratcheting prices tighter.

This last session – and today’s into the ECB – suggest we’re going to get some calm, and some of the high-fiving is over.

Bollore: Rare foray from the unrated borrower

We saw some sense return to the new issue pricing regime, with a couple of the deals only tightened by 5-10bp versus initial indications, although that might have been only because the issues were perhaps a harder sell.

That’s because Bollore, for example, which isn’t exactly a household name outside of the French “transportation and logistics” system (even though it has a global reach) lopped a stunning 25bp off from the initial guidance! They are unrated and a rare borrower.

Away from that, we might also have expected there to have been a bit of indigestion too, having had to swallow €17bn+ worth of deals in 12 sessions, but we can safely assume that wasn’t the case.

The ECB is today’s business while we have Trump’s inauguration as US President on Friday to look forward to. And US economic, foreign and any other policies might come off the hoof, ad hoc thereafter – we will read it all first on Twitter.

History beckons

The EU hierarchy in the main were circling the wagons after the opening salvo of gunfire heard coming from the UK government as regards their Brexit policy. The Empire stands proud, tall and expectant. Nevertheless, some of the responses from the EU were quite conciliatory and this allowed the markets to gain a risk-on positioning.

Equities were up, government bond markets sold off a little, sterling gave back some of its gains of the previous session and credit managed to plod along with issuance again taking centre stage as secondary edged tighter for choice.

Article 50 will be triggered in a few weeks, and there promises to be much fun and games and posturing into it – but only then will the real intentions of the EU towards the UK be known.

The news flow otherwise saw UK publishing group Pearson hammered after a profits warning with it’s stock down almost 30%, it’s CDS wider and cash bonds trading lower. There were several other UK groups reporting misses on the profits front (Experian, Premier Foods and so on) and we might see more of this with those companies which are reliant on stable exchange rates.

US earnings from the banking sector were on the up (Citi, Goldman) set against weaker earnings elsewhere in the US. US industrial production in December rose a better than expected 0.8%, while CPI rose 2.1% year on year.

But credit still printing

A trio of non-financial deals from Bollore, Accor and SNAM kept the IG non-financial investor base occupied. The unrated Bollore printed €500m at midswaps+195bp (5-year), while Accor raised €600m in a 2x subscribed deal but only 7bp tighter than the initial price guidance.

Italian utility SNAM was back also for €500m at midswaps+85bp for 8-year funding and 10bp tighter than opening indications. Outside of the non-financial sector, German housing association group Vonovia came with a 2-part deal for €1bn combined.

£675m deal with 5% yield: Virgin Media

In euro high yield we had Hapag-Lloyd in for €250m. Elsewhere, deals of note took in £675m from Virgin Media which offered 5% yield for a 10-year maturity, and then we had a massive €6bn from Italy amid orders for €21bn.

No trouble there for the beleaguered sovereign, under fire from the EU on its fiscal accounts (needs to make adjustments – cuts), rating agencies (DBRS downgrade) and a busted banking sector!

And the rest was predictably risk-on

Safe-havens were not in demand amid the upbeat economic news. Government bond markets were a little weaker, with yields heading higher. The 10-year Bund yield moved to 0.35% (+3bp) while the weight of supply of the new deal in Italy saw yields there up at 1.96% (+4bp). The 10-year Gilt was unchanged to yield 1.33% while we had the US Treasury giving 2.42% in yield (+9bp). The sell off in the US came on the back of Yellen’s speech which warned about nasty surprises if the Fed didn’t act quickly enough.

Equities in Europe were up to 0.5% higher, while early enthusiasm in the US was faded, probably on apprehension around Trump being in charge of the US come Friday.

Secondary credit was slightly better bid for a change, and this left the broad measure of the cash market – the Markit iBoxx IG index – at B+136bp (-0.5bp), but it is still 1.5bp wider this year. The sterling market closed unchanged. In line with the generally better tone, although no asset class ran away with it, the high yield market managed to garner some decent performance and the index closed tighter, at B+389.5bp. Main closed at 69bp and X-Over at 289bp.

It’s the ECB up next. They ought not to change anything. 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.