6th November 2018

Trump’s mid-term report

iTraxx Main

69.6bp, unchanged

iTraxx X-Over

285.6bp, -2.4bp

🇩🇪 10 Yr Bund

0.43%, unchanged

iBoxx Corp IG

B+143.1bp, -0.5bp

iBoxx Corp HY

B+xxxbp, -+xbp

🇺🇸 10 Yr US T-Bond

3.21%, +1bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

If only it were that simple…

One would think that corporate borrowers ought to be champing at the bit in order to get a deal away. If only because many fear that the ECB’s QE stimulus withdrawal at year-end will necessarily result in higher funding costs. It’s not that simple because the Eurozone economy is slowing and that might put the brakes on rising rates (or at least slow the pace), while economic weakness might reduce the allure of equities and keep the cash tucked away in the corporate bond market. It’s an argument on relative asset valuations that has been fleshed out many times over the past few years.

Anyway, the primary sluice gates are not open and gushing deals, despite an improvement in the flow on Tuesday. It’s not a crisis year but we’ve many geopolitical issues to contend with, let alone severe levels of equity market volatility and losses of up to 10% in a month in stocks, during October. And it also feels as if the tide might be shifting away from more predictable global macro, borne from the economic warfare being waged by the US administration, without there being a systemic situation that might also explain the current primary corporate bond market ills.

Macro uncertainty has been biting of late. On Tuesday, we had another dreadful economic report from Italy, where the composite PMI (services and manufacturing, that is) fell to 49.3, signalling a contraction in both sectors of the economy. It’s the lowest level in five years and goes back to the start of the Eurozone crisis recovery period. The country needs help, the Eurogroup has (needs) to give the sovereign some leeway on the budget. Instead, they’re not – as they stick to rigid orthodoxy as subscribed to by the various treaties. It doesn’t look good at all, and the fuse continues to burn.

Primary trying to get going

Primary was busier than what we have been used to of late with deals on sterling and euros, across SSA, covered and corporate bond markets. The corporate market’s focus in that sense was on Chinese-owned warehouse lessor Logicor which came in with a three-tranche offering for a combined €1.8bn. The 4-year maturity offering for €1bn was priced at midswaps+130bp (-15bp versus IPT), the 6.5-year maturity tranche was for €500m and cost midswaps+180bp (-10bp versus IPT), while the 10-year €300m offering was 5bp inside IPT at midswaps+230bp.

UK insurance group Aviva took €750m in a 9-year senior deal priced at midswaps+108bp, off a €1.7bn book and 12bp inside the opening guidance.

The rest of the issuance was from the likes of the EFSF (€4bn), Export Development Canada (£500m), Eurofima ($500m), TC Dudgeon OFTO plc (£272.75m), Coventry Building Society (covered bond) and DZ Hypo (covered bond).

Market waits, gridlock beckons

We endured another mixed/uncertain session, coming from continued mixed earnings reports and there was obviously a massive focus on the US mid-term elections. There will be more of a reaction on Wednesday, but into it, few were willing to take a view. And so the session almost replicated that which we went through on Monday. That meant that stocks were generally trading mostly flat (FTSE underperforming), rates were also close to unchanged and secondary credit again did very little, with investors distracted a little by the deals in primary.

The US indices traded up to 0.4% higher during the European session and this helped European bourses come off the worst levels for the session and close to flat at the close, while the FTSE was off by 0.9% probably on sterling strength, as the cabinet met to thrash out their latest Brexit response.

Rates ended a touch better offered, with the 10-year US Treasury yield up at 3.21% (+1bp), the 10-year Bund yield at 0.43% (unchanged) and Gilts yielding 1.53% (+3bp). The 10-year BTP yield moved up to 3.41% (+8bp).

In credit, primary IG non-financials had just that Logicor deal which takes the total for the month so far to €3.2bn of issuance. It’s early days regarding an extrapolation for the full-month, but €20bn – €25bn must be possible, we would think. Otherwise, the hesitant market and slight bias to the downside for risk didn’t really feed through init the protection market, and a quiet session left the iTraxx X-Over index at 285.6bp (-2.4bp) with Main at 69.6bp (unchanged).

In the secondary cash market, we edged tighter for choice and the iBoxx IG index closed at B+143.1bp (-0.5bp), representing a grind tighter since the beginning of the month by 2.5bp. Total returns for IG credit are at just -0.8% YTD and -0.9% for the high yield market, where the session closed with the HY index left at B+425bp (-1bp).

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.