3rd December 2019

Markets Trumped yet again

iTraxx Main

50.3bp, +1.3bp

iTraxx X-Over

230.2bp, +4.8bp

🇩🇪 10 Yr Bund

-0.35%, -7bp

iBoxx Corp IG

B+114.7bp, +0.5bp

iBoxx Corp HY

B+386bp, +8bp

🇺🇸 10 Yr US T-Bond

1.70%, -13bp

🇬🇧 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″]

2020: Downside risks lurk…

We have yet another iteration in the process. Does anyone really care any more? We previously suggested that the Chinese could afford – politically and financially – to play the long game regarding the trade tariff talks. With an election looming, the lack of a decent, encompassing deal between the US and China would possibly eat away into Trump’s self-professed, yet questionable, magic regarding his ability in getting a good deal done. Depending on how it is spun, it may well weigh on his re-election hopes – alongside many other issues, of course.

Well, he surprised in the session, suggesting that it might be better that a trade deal waits until after the US elections (next November)! That, after slapping punitive tariffs on Monday on steel and aluminium imports from Brazil and Argentina – as well as threatening the EU (France in particular) with tariffs, and we are almost back to square one. Add to it the spat with France’s Macron at the NATO summit and it’s a case of all hands back to the pump.

The markets were in retreat. Equities ratcheted lower and safe-haven government debt was doing its best to recover the losses from the previous session, as a better bid emerged on those trade fears. The Dax was doing its best to hold out, trying to make up for Monday’s exaggerated weakness and was helped in part by the lack of a focus, perhaps, from Trump on specific tariffs on German goods. But even that market eventually succumbed and mostly faded the gains. Better still to be out of sight of Trump’s ire.

In credit, secondary didn’t do too much (weaker though), while in primary there was an insurance flavour to the issuance as Chubb INA and Ageas NV printed, with E.ON the only other borrower in the plain vanilla market.

It would appear now that unless we get some more seriously negative headline risks emerge over the next week or so, credit is close to its ‘up sticks’ moment for the year. It is always worth dwelling on what we have achieved, though.

Because against all expectations when we kicked-off, it has been an excellent year for the asset class. There have been one or two hairy moments, but we’ve managed to hold on to total returns in IG of 6.4% at the moment (spreads -58bp iBoxx index), 14% for the AT1 market (spreads -264bp) and over 9% for the high yield market (spreads -145bp).

2020 is most definitely going to be a different story.

Primary slows, finally

As suggested above, it was insurers who dominated primary. Belgium based insurer Ageas priced €750m of a PerpNC10.5 RT1 offering priced to yield 3.875% which was 50bp inside the initial guidance, the juicy coupon attracting interest of €5bn.

Chubb followed with a dual-tranche offering, having been in the market back in June – also with a dual-tranche transaction. This time they took €700m in a 5-year deal at midswaps+55bp which was 25bp inside the initial price talk, and followed up with another €700m in a 10-year at midswaps+82bp (-18bp versus IPT). The books were equally as impressive as the Ageas deal, up at €4.5bn.

The sole IG non-financial deal in the session came from E.ON. The German-based utility took an opportunistic no-grow €500m in a short 3-year maturity at midswaps+35bp. The near €2bn book allowed for the final pricing to be tightened by 20bp versus the initial talk.

That E.ON deal took the total year to date volume of IG non-financial issuance to €316.5bn, of which a record €97bn (or 30.7%) has been issued by US-domiciled borrowers.

Merry Christmas, indeed!

Jolted by the comments on the trade talks, after the “…we’re doing very well with China right now…” quip, the markets were shaken out of any year-end slumber. As at the European close, the Dow had dropped by 1.4% and the S&P by 1%. Treasuries went massively bid only, the yield on the 10-year dropping by 13bp to 1.70% (!)

In Europe, the FTSE gave up 1.75%, against the grain the Dax was up 0.2% while the CAC moved 1% lower. The yield on the 10-year Gilt declined to 0.67% (-7bp) and the Bund recovered Monday’s losses with the yield lower at -0.35% (-7bp).

Credit protection was better bid (higher) but in measured fashion, all being told. iTraxx Main moved 1.3bp higher to 50.1bp and X-Over was 4.8bp wider, at 230.2bp into the close.

For the cash market, it was also measured response to the day’s events. That means the IG index (iBoxx) only widenened by 0.5bp to 114.7bp but we saw a little bit more weakness in the CoCo market, with the index up at B+445bp (+11bp). Low flows and minimal activity of course across the cash market, but the high yield market closed with the index at B+386bp (+8bp).

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.