20th June 2018

UK rebellion off

iTraxx Main

67.7bp, -1bp

iTraxx X-Over

300.1bp, -1.3bp

🇩🇪 10 Yr Bund

0.37%, unchanged

iBoxx Corp IG

B+126.4bp, +0.2bp

iBoxx Corp HY

B+382bp, unchanged

🇺🇸 10 Yr US T-Bond

2.91%, +1bp

🇬🇧 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=”15″], [wp_live_scraper id=”16″]

Respite session welcomed…

It was a regular day in the markets on Wednesday and a better one for risk assets to go with it. Geopolitical and macroeconomic event risk took a back seat and it seemed like the whole of the market converged on Westminster for that crucial EU Withdrawal Bill vote. It was last chance saloon for the remainers to get Parliament to have a ‘meaningful’ vote on any final deal which the UK government may or may not agree with the EU. They failed with some sort of fudge agreed which effectively kicked the can down the road (to January). In credit, borrowers queued up to get deals away and there was a clear financials bias to the supply although several non-financial issuers were also on the screens.

The much-needed relief for the markets took equities higher with the FTSE in the ascendancy as it gained by over 1% earlier in the session, helped in no small part by the drop in sterling versus the dollar as it traded off a $1.31-handle into the vote jitters. Other equity markets were higher by a much smaller amount. There was a tentative feel around the rate markets and they traded out the session close to unchanged. Secondary credit traded out the session in a narrow range, probably better bid for choice and not particularly exciting, but there were plenty of interesting primary issues to look at which is where all the action usually is.

It has been another ‘so-so’ week for secondary credit, with spreads generally a touch wider while once again exhibiting none of the volatility going through the equity markets or any of the support bid or otherwise seen in safe-haven rates. Spreads are not immune to the worst of it, although any tightening is measured reflecting poor market liquidity, a refusal by investors to chase the market but also how the Street plays the market. We can say, however, that any so-called ‘safe-haven’ plaudits which the corporate bond market gained over the years (supported by low default and rating transmission rates) are no longer being expressed, as the asset class (spreads) has come under pressure this year.

So the focus of the credit market was on the primary flow and the Volkswagen dual-tranche hybrid offering would have had most of the attention. EDP was the other non-financial borrower in euros. Cambridge University finally came with their 60-year plain vanilla bullet along with a 50-year linker in sterling with Experian and Bank of Nova Scotia rounding off one of the busiest sessions for this market this year.

Primary settles the palette

The corporate hybrid market has been a relative outperformer within the higher beta credit market this year. The iBoxx index has widened by 62bp and returns are at -1.35%. Picking up some extra yield for a non-financial corporate borrower by going down its capital structure, especially when its senior debt might be deemed as being expensive, has boosted the lure of non-financial hybrid corporate debt.

Having issued €2.65bn already this year through various Volkswagen entities, the diesel-scandal beleaguered entity was back for hybrid funding of €2.75bn. The issuer took €1.25bn in a PNC6 deal to priced yield 3.375% and a PNC10 tranche for €1.25bn priced at 4.625% – managing to reduce the final yield by 12.5bp in both cases. Combined books came in at over €8bn.

The other IG non-financial borrower in the session saw EDP revisit after an 8-month absence for a €750m long 7-year priced at midswaps+105bp with books at final pricing at €1.8bn versus €2.4bn at guidance, with obvious dissent as leads saw fit to reduce the final price by 25bp (too much, that is).

Senior financials were represented by KBC’s €500m 5-year green bond offering at midswaps+72bp (-8bp versus IPT, books €1.6bn). In the subordinated market, CNP Assurances took €500m in a PNC10 RT1 structure priced to yield 4.75%, while Danske Bank plumped $750m in a PNC7 AT1 deal with a 7% coupon.

In sterling, Experian lifted £400m in a September 2024 maturity transaction at G+110bp and Cambridge University issued £300m in a bullet 60-year at G+77bp (books £900m) with a £300m 50-year linker at Gi+182bp (books 800m). Finally, Bank of Nova Scotia issued £250m in a long 5-year at G+90bp.

Closing with a whimper

The markets recovered a little of their losses from Monday, as seen with equities higher by between 0.3-0.8%. There’s still enough apprehension with investors but some of the worst fears might have been assuaged for the moment following some conciliatory words coming out of China on the trade tariff brouhaha. The headlines were focused on the UK Withdrawal Bill and US immigration policy.

Rates traded in a very tight range leaving 10-year Gilts to yield 1.29%, the US Treasury 2.91% (+1bp) and Bunds 0.375% (unchanged). Even BTPs could find any inspiration to move and were also left unchanged with the 10-year yielding 2.56%.

Credit did very little. In the credit synthetic space, iTraxx Main closed a basis point lower at 67.7bp and X-Over just 1.3bp lower at 300.1bp. As for cash, the market closed unchanged leaving the IG iBoxx cash index at B+126.4bp and the high yield index at B+382bp.

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.