22nd November 2017

UK budget stymies activity

iTraxx Main

48.2bp, -1.6bp

iTraxx X-Over

238.6bp, -1.5p

10 Yr Bund

0.35%, unchanged

iBoxx Corp IG

B+100.2bp, -0.4bp

iBoxx Corp HY

B+281.8bp, -3.2bp

10 Yr US T-Bond

2.32%, -4bp

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″]

But the UK is in the limelight…

It’s not often that UK budget day grips the market so much that it comes to standstill. With Brexit negotiations potentially about to reach a crucial phase, UK politics are now front and centre. Or maybe it was something to do with the budget also coming on the eve of the US Thanksgiving break?

Whichever, we played out in tepid fashion through a very light session with primary closed, save for a sub-benchmark Iberdrola deal and some SSA/covered bond issuance. There was little by way of headlines by which to trade off, and European equities failed to push on with any gusto on the back of yet another record-breaking performance in US equities in the previous session. It was a mildly risk-on session though, but the flows and volumes through it were extremely light, effectively bringing the week to a premature end.

There is no doubting that November hasn’t quite gone the way we, or most, might have expected. Coming off the back of a very good couple of months previously, there was little reason for the market not to push on. It hasn’t, except for US equities. Fixed income markets in the rate space are treading water. The corporate bond market has seen a modest pull back in IG spreads but something a little more sinister (some would have us believe) for the higher beta sectors. Supply has been excellent and demand for risk has remained fairly robust – when this measure is used – leading to a bit of a confusing picture for the corporate bond markets. Or is it?

It has been many years now since where the secondary market provided an efficient arena for which investors could take down paper. Liquidity has been dire since even before the financial crisis. Now when paper looks cheap, offers are not forthcoming and the screen price rarely works, leaving investors who might wish to add more risk extremely frustrated. The reverse is true when a Street bid is required into any general weakness. That bid is either extremely unattractive, the order needs working, or is simply not there.

So it is a small wonder than all and sundry pit their wares in the primary market. The primary market has at times been gushing with issuance (see below). There’s an element of frustration for smaller investors in the primary market, but it has become the most ‘effective’ way in which to try to lift some paper – at a ‘fair’ price. It’s not necessarily efficient (prices being ratcheted tighter versus IPT etc), but it works for both parties – as if there is a tacit understanding between the syndicate desk and the investor.

Primary grinds to halt

We had the expected slowdown in primary, and look forward to the markets reopening next week. It is unlikely that we see much in terms of issuance on Thursday and Friday, although more market insensitive deals might get priced – SSA and/or high yield issues. It has been a very good month for primary, though. In the investment grade sector, non-financial issuance has topped €26bn and the year to date tally has risen to over €254bn. That comes after a fairly disappointing October, but we are now looking in the context of a €270bn full-year for issuance. Iberdrola was the sole borrower in IG in the session, with a €300m 12-year deal priced at midswaps+60bp (probably a reverse enquiry deal).

For the high yield market, we are up at almost €5bn of issuance for the month, in this record-breaking year (€66.7bn of supply year to date). We are looking now for something north of €70bn for the full-year and we can expect deals to get priced in quieter moments (like the Thanksgiving period) and into the middle weeks of December.

In the session, we did have a deal from tunnel construction group Bazalgette Finance PLC for £250m, while BNP Paribas Cardiff issued a very rare Tier 3 deal, in a 7-year maturity at midswaps+65bp.

Credit holds its ground

US equities were trading flattish but flirting with setting fresh records (the Nasdaq did intraday), while in Europe, the Dax was the big loser as it dropped by over 1% eventually dragging other bourses lower by much smaller amounts.

Duration got bit of a bid behind it into the close, although that just meant most rate markets closed unchanged. The benchmark 10-year Gilt yield was left at 1.28%, the Bund at 0.35% and the US Treasury was 4bp lower at 2.32%, even allowing for the release of the Fed minutes which suggested a December rate hike was quite possible.

In the synthetic credit market, iTraxx Main crunched lower, left at 48.2bp (-1.6bp) and outperformed X-Over which dropped 1.6bp to 238.6bp. For both, these are good recoveries after some considerable weakness last week.

The cash market was extremely quiet, but better bid for choice in IG such that the Markit iBoxx index ground out just 0.4bp gains to B+100.2bp (returns are still negative month to date). Higher beta moved a little better too, the CoCo index 5bp tighter at B+381bp, and now just 30bp off the record low seen at the end of last month.

In the high yield market, a slight better bid, but nothing really by way of flow into it. Primary drew a blank. The iBoxx cash index closed at B+281.8bp (-3.2bp)  which is the sixth successive tightening, but we’re still 28bp wider than the record tights seen two weeks ago.

With Thanksgiving upon us – and there likely being little activity into it, we’re going to take this opportunity to undertake some website maintenance. As such there will be no daily on Friday. We hope this doesn’t inconvenience you too much. We will be back as usual on Monday.

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.