- by Suki Mann
|🇩🇪 10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY
|🇺🇸 10 Yr US T-Bond
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Italy riles again…
On the surface, the Italian government made a fair point suggesting that the French run a near 3% budget deficit in perpetuity, without sanction. The difference is, of course, the relative ability of the sovereign to service its obligations. Creditworthiness, that is. Anyway, the Italian administration is not backing off from their budget demands and the markets have clearly taken fright.
After a quiet opening, a few choice words from the finance minister about the country’s economic outlook (deterioration) sent the markets almost everywhere into reverse – before they staged a late recovery!
Italian bond yields rose initially, the 10-year almost at a 5-year high at 3.71% (+11bp) and equities moved into negative territory just as it looked like we might have been heading into some calm. But we’re playing to the headlines, and so long as the Italian government and the EU both play hardball, few are going to be bottom fishing. Time will tell if there are bargains to be had at these levels.
After all, we have been here before and pulled back, hard. BTPs in the 10-year previously saw yields up at 3.30% before declining to 2.70% in the summer. In the corporate bond world, the exposed banking sector has been feeling the chill, too.
Prior to heading into the original turmoil in Q2, Unicredit’s 5.375% AT1 issue was trading at or above par, only to drop 14 points into the end of May to €88, before bouncing back and trading in the €88 – €94 range for much of Q3. It’s now back at around €90, or off 2 points in the last fortnight.
We did have that afternoon recovery which left 10-year BTPs yielding 3.50% (-3bp), equities generally higher and safe-havens fairly mixed. So the Italian (debt) situation isn’t yet spiralling out of control. But it can – and it can very quickly.
The way the markets are reacting at the moment, they’re thinking the worst but believing it can’t happen. We would think that Juncker et al can’t really ‘punish’ the Italians, they’ll do their best to leave meting out any punishment to the UK. The EU will try and contain the issue of populism and prevent it from contaminating the financial system. A fudge will likely be the order of the day, and the problem will be stored up for another day.
In the meantime, a few might feel they can’t justify, have the need or confidence to add any potentially oversold (peripheral) risk. However, there was no problem in peripheral primary in the session – suggesting that the Italian situation has a level of containment at the moment. Portugal’s EDP issued €600m in a 7-year green bond at midswaps+123bp. The €2bn+ book allowed for the borrower to reduce final pricing by 22bp versus the initial guidance.
Volkswagen brings some relief to primary
As well as the EDP deal mentioned above, Volkswagen was the focus for the market as it came with a 3-tranche effort for a combined €2.6bn. And it was the sort of deal that is just the tonic in this market. That is, VW is blue-chip industrial, with a well-known solid name, a frequent borrower (one of the largest int he market) and having a well-established curve.
The borrower managed solicit interest for a combined book of €4.5bn for the three tranches and printed €1bn in a 2-year at midswaps+40bp (-15bp versus IPT), a 5-year for €850m priced at midswaps+95bp (-15bp) and an 8-year maturity for €750m at midswaps+140bp (-10bp versus IPT).
Overall, a healthier €3.2bn was issued in the session, taking the monthly total so far to an underwhelming €4.7bn, for IG non-financial issuance. The other corporate of note was Western Power Distribution in for £350m at G+210bp.
Fears mostly subside into the close
And so, into the close we had a bit of a recovery across the markets. BTPs closed as indicated earlier, the 10-year Bund yield closed at a yield of 1.55% (+1bp) while the Gilt was yielding 1.72bp (+3bp). There was some talk of a Brexit deal being reached as soon as next week – although parliament would still have a large say in it finally being adopted/agreed.
Equities also staged a bit of a comeback, having been in the red for much of the session, and managed to close mostly in the black with the Italian index outperforming as it rose by 1% (having been over 1% lower earlier).
In credit, the synthetic indices were unchanged at the close. iTraxx Main closed at 71.1bp and X-Over at 286.6bp with some recovery as the afternoon session showed some recovery for risk assets.
In cash, overall it was a quiet day but the VW deal offered some distraction from any tedium. In all, it left the iBoxx IG cash index a touch wider for choice, at B+131.6bp (+0.5bp) with only moderate weakness in the AT1 market as the contagion impact from Italy’s woes stay contained for the moment.
Finally, the high yield market drew a blank again in primary and there wasn’t too much occurring in secondary either. The weakness was a little more obvious and the HY cash index closed at B+392.6bp (+5bp).
Have a good day.
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