23rd September 2019

The numbers don’t lie

iTraxx Main

55.5bp, +1.3bp

iTraxx X-Over

224.0bp, +8.4bp

🇩🇪 10 Yr Bund

-0.58%, -6bp

iBoxx Corp IG

B+124bp, +1.5bp

iBoxx Corp HY

B+401bp, +7bp

🇺🇸 10 Yr US T-Bond

1.70%, -5bp

🇬🇧 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″]

We’re in recession…

The opening session of the week was a ‘run for the hills’ moment. Not such a bad thing for fixed income markets with that rally in safe havens. There was unrest in Hong Kong again over the weekend, services and manufacturing PMIs in both Germany and France for September were very weak, Middle East geopolitical concerns continue to concern and those trade talks between the US and China are still up in the air.

Thomas Cook’s demise, although anticipated by market participants over the past few months (see our report from May), would still clearly have added to the weaker tone.

It’s probably safe to assume that the continued decline global trade will make sure that Germany enters a ‘technical’ recession at the end of Q3, and the Eurozone as a whole won’t be far behind. The numbers suggest that we are back in economic crisis territory, given that the data is now showing the weakest levels of activity (in German manufacturing anyway) since 2008. And it is happening without the associated collapse in financial markets.

Nevertheless, there was a decent pull-back in markets. Equities initially lost well over 1% in the session before managing to claw some back, while the bid for government bonds saw yields fall by up to 6bp across most 10-year benchmarks at the open. Corporate bond markets were better offered, as one might have expected.

Although primary was open, the deal flow was lighter for what we might have gotten used to during previous Mondays this month. The euro-denominated non-financial IG market drew only its second blank session this month, for example.

The ECB’s promised action can’t come soon enough (November 1 for the purchase programme), but we don’t think it will do much other than to stem the rate of the decline in economic activity. Q4 growth dynamics are not necessarily going to improve with further easing funding and debt servicing costs as policy and markets rates decline some more.

So we’re still thinking in terms of -0.75% for the 10-year Bund yield as the next stop (we stopped just short of it by a few weeks ago), while -1.0% is also in view, but likely now in Q1.

Credit spreads might be experiencing some immediate weakness, as we might expect when risk assets come under pressure. But any widening will be limited, fortified to some extent by a demand dynamic which looks well entrenched for this fixed income asset class.

Credit markets should not fall off a cliff. We think that most of any spread weakness will be offset by the rally in the underlying and total return portfolios should maintain their current levels of performance.

Ill winds stymie primary markets

The aforementioned situations around macro and geopolitics made sure that the week got off to a quieter start. It’s unusual that we have a black day in IG non-financials, but after over €40bn of issuance this month, no one was going to be concerned or raise an eyebrow.

Deal incoming?

Still, we have Thermo Fisher’s multi-tranche, multi-billion deal is due possibly Tuesday with Infineon also potentially on the screens with a dual-tranche hybrid.

For Monday, Generali effectively had a clear field as it went the green bond route for €750m of 11-year maturity Tier 2 debt costing midswaps+225bp. With books up at €3.25bn, the Italian insurance giant managed to reduce the initial price talk by 35bp. The insurer was also buying back older subordinated debt.

In the financials sector, Euroclear Bank issued £350m in a 5-year senior preferred at G+90bp (-15bp versus IPT), while Sparebank 1 Oestlandet issued €500m also in a 5-year senior preferred at midswaps+67bp (-8bp versus IPT).

The sole IG non-financial issuer was Henkel as the German-based borrower issued £400m in a 3-year at G+60bp (-10bp versus IPT) and £300m in a 7-year at G+90bp (-5bp). Combined books were at over £1.3bn.

The much troubled Metro Bank was marketing a sterling deal, and was struggling to get enough interest in for the £200 – 250m of senior non-preferred 4NC3 funds, even with it offering a desperate eye-watering coupon of around 7.5% and eventually pulled the deal. Sometimes, there’s no price.

Rate markets dominate

We’re looking forward now to the ruling due on Tuesday morning by the UK’s Supreme Court on the lawfulness or otherwise of Boris Johnson’s prorogation of Parliament (and his advice to the Queen). That and, as mentioned previously, the Eurozone PMIs in service and manufacturing along with Thomas Cook’s collapse were the key drivers in the markets.

Radical ideas: Corbyn

Labour’s annual conference also stole many headlines in the UK largely because the party’s message on Brexit perplexed, there was a call to reduce the working week to 4 days (and 32 hours) and they voted to do away with fee-paying private education.

So on that wary and weary note, the FTSE lost only 0.2% (it was much worse earlier in the session), the Dax was 1% lower and most other European markets also lost in excess of 1% in the session. The US opened slightly in the red, but was trading around flat as at the time of writing.

The 10-year Gilt benchmark closed 9bp lower to yield 0.54%, the equivalent maturity Bund yield dropped to 0.58% (-6bp) and the Treasury yield on the 10-year benchmark fell to 1.70% (-5bp), as at the same of writing.

In credit, the market also took a bit of a defensive posture and so protection costs rose, leaving the new S32 Main contract a little higher at 55.5bp (+1.3bp) and X-Over 8.4bp higher at 224bp.

The iBoxx IG cash index closed 1.5bp wider at B+124bp. In the higher beta areas, the AT1 market edged just a smidge wider, the index at B+489bp (+5bp) while the high yield market closed with the cash index at B+401bp (+7bp). That after closing completely unchanged for the previous six sessions!

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.