10th October 2017

Throwing in the towel

MARKET CLOSE:
iTraxx Main

56.0bp, -1bp

iTraxx X-Over

244.5bp, -4bp

10 Yr Bund

0.44%, -1bp

iBoxx Corp IG

B+106.5bp, -0.4bp

iBoxx Corp HY

B+277.2bp, -0.6bp

10 Yr US T-Bond

2.34%, -2bp

FTSE 100 [wp_live_scraper id=”4″], [wp_live_scraper id=”5″] DAX [wp_live_scraper id=”12″], [wp_live_scraper id=”13″] S&P 500 [wp_live_scraper id=”10″], [wp_live_scraper id=”11″]

We’re calling it…

Not going to happen: IG record supply

Just like a bookmaker who pays up early because the result is so obvious, we’re going to call it. The IG non-financial primary market is not going to get anywhere near the record volume level of supply this year. In fact, it will barely reach the average of the past three years – which is €264bn. So we’re not remotely thinking in context of the record level seen in 2009 of €285bn, while the 2013 level of €232bn is in reach – and we ought to pass it, quite easily.

The current YTD total, after all, stands at €214.5bn with probably 8 weeks of business left for this year. However, we’ve had just €4.6bn of issuance this month so far and the previous three Octobers have trumped up €16bn (twice) and €26bn in issuance.

We keep making excuses; Non-farms, the earnings season, some important policy maker’s speech or whatever. But if we don’t get that issuance, more than a few investors are going to be left with ‘spare’ cash which will need to get invested before year-end. That might mean some desperation into an even more illiquid secondary market in December – and a ratchet tighter in spreads.

An explanation for the curious reduced level of supply leads us to thinking that corporate borrower balance sheets are stuffed with plentiful levels of cash (well, we know they are). As a result, corporate treasurers might be comfortable (now) in the knowledge that the funding markets are open and any need for funding easily satiated by an investor base with still oodles of cash to put to work. In addition, the official policy rate regime is only going to see a small unwind (taper in the Eurozone, rate increases in the US), while market rates look stubbornly anchored at around these levels – and/or are edging higher with some difficulty.

So, we had been thinking in terms of €50bn+ of issuance through October and November, in IG non-financials. December is always more difficult to gauge, but usually has much reduced levels. Now, we’re reducing our expectations to the €30-40bn area which should take us to around the €250bn level for the full-year.

It’s a different story for the high yield market, where at €51bn we’re already at the second-best level for issuance on record. We believe the year will end with a fresh record (need over €57bn), given the size of the pipeline and borrowers looking to get deals away. This will not, in our view, have any impact on the secondary market. Spreads ought to continue to tighten through current record lows and will be impacted more on macro/geopolitics and equity markets rather than another €10bn or so of supply this quarter.


German borrowers still missing

Staying with primary, we had just Italy’s SNAM in the market for €650m in a 10-year at midswaps+57bp, which was 13bp inside the opening guidance. They’re the first IG non-financial issuer this week.

Looking at the supply since the beginning of July, and rather curiously, we find that German domiciled corporates have been very quiet. Blink and you will miss them. Only Daimler (€500m) and Brenntag (€600m on 20th September) have been in the market. €52n of debt has been issued in the IG non-financial category. That has German issuance at just 2% of the total supply. Historically, they’re responsible for 20% of the total issuance in any given year. The most prolific borrowers in the period since July are the British (22% of the total), French (20%) and Italians (15%).

How can that be so? Is German industry throwing off so much cash at the moment that refinancing and funding requirements are so low?

We had Dufry add €800m in the high yield market in a 7NC3 deal priced to yield 2.5% and this took the monthly total to a very good €2.9bn. The borrower had originally intended to limit the deal to €500m, but if the demand is there, it would be rude not to raise the extra €300m and refinance other (potentially more expensive) debt obligations. We think the month is going to be a good one for this market with plenty of issuance likely.

The other deals of note in the session came from Mizuho in a senior deal for €500m in a 7-year maturity green bond, and from Banca IFIS we had €400m in a 10NC5 Tier 2 structure priced to yield 4.5%. It’s been a busy month in senior financials with nine issues already, and a total of €5.3bn printed. The rest was covered bonds, sovereign deals from the likes of Slovakia and Romania, while the EFSF took €3bn. In addition, the covered bond deal worth a mention came from the National Bank of Greece.


Drab session, credit grinds tighter

As for the session, everything played out in mediocre fashion. Admittedly we saw new intraday record highs in US stocks, but that faded after a solid open. Equities were a small up or a small down across Europe. Government bond markets showed the same with Gilt yields unchanged at 1.37% in the 10-year maturity, Bunds at 0.44% (-1bp) and Spanish Bonos at 1.70% (+1bp) – ahead of the Catalan government’s potentially ‘illegal’ call for independence.

In the event, independence was called (and subsequently rejected), but suspended for 2 weeks pending discussions with the Spanish government. US Treasuries rallied a little, leaving the 10-year to yield 2.33% (-4bp).

The synthetic indices dropped by a basis point for Main to 56.0bp and 4bp on X-Over to 244.5bp, as the cost of credit protection fell into a better tone for risk assets.

In the cash market, we were better bid for choice and this left the Markit iBoxx index a little lower at B+106.5bp (-0.4bp). This is the tightest level since last August and 4bp off the lows seen this year (in early August). Similarly, the high yield market was only going to be marked tighter and the index closed at a record-equalling low level of B+277.2bp (-0.6bp) while the index yield was at a record-equalling low of 2.62% (-2bp in the session).

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.