11th March 2019

Uncle Sam to the rescue

iTraxx Main

62.5bp, -2.1bp

iTraxx X-Over

284bp, -6bp

🇩🇪 10 Yr Bund

0.07%, unchanged

iBoxx Corp IG

B+148.25bp, -0.5bp

iBoxx Corp HY

B+458.5bp, -1bp

🇺🇸 10 Yr US T-Bond

2.65%, +2bp

🇬🇧 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″]

Calm amid stormier waters…

The reverberations from last week’s slashing of growth and inflation Eurozone forecasts for 2019 by the ECB are still being felt. Equities had a bad couple of days and, admittedly, we saw a smart bounce in this week’s opening session, but it all feels tentative. It won’t take much for the benchmark 10-year Bund yield to see 0% (0.07% currently). If there has been a clear winner – rather an outperformer – in the risk asset space, then it has been the credit market.

Returns are up because of the bid for the underlying, while spreads have only eased wider. Nevertheless, the corporate bond market hasn’t gone unscathed because the volatility and weakness seen in equities has eroded some confidence and put a stop to the aggressive pace of issuance seen in the period leading up to that press conference last week.

The Brexit situation isn’t going to help with this week with some frayed nerves likely to persist as the UK government holds a series of votes on the issue. It’s squeaky bum time and threatens much volatility for the markets and even has the potential for some serious UK government upheaval.

So we can expect a reduced level of activity. The breakneck pace of primary market activity through January, February and some of the first week of March looks as if it has come to an end. At least we have a chance to absorb those deals and work up an appetite for the next slew of deals which might come.

In addition, such is the level of the rates (low) and the spreads (tight) markets, issuers can bide their time and pick the moments most accommodating for any transaction. The odds favour a higher level of IG non-financial deal flow than last year’s €220bn, whereas we have previously forecast a drop to €200bn for the full-year. It’s just that we might not get much this week, while the rest of the month’s flow might depend on how events develop at Westminster.

We still like risk. Higher beta credit will remain in the ascendancy. There will be periods where we give some back, but we have plenty in the bag to carry us through periods of volatility. Careful selection in the AT1 market work, as does a broad portfolio positioning with a higher beta than the index. 

Yanks to the rescue, again

US junk food to the rescue

We can always rely on the Americans to come to the rescue, just as we batten down the hatches across Europe. After a two-day lull in IG non-financial issuance at the back end of last week, we had another blank session from European borrowers, but PepsiCo and McDonald’s stepped up to give investors something to chew on.

After a break in issuance from US borrowers following the €7bn deal from Medtronic a week ago, McDonald’s lifted €1bn in a dual-tranche deal split equally between a long 7-year and 12-year maturities. The first printed at midswaps+65bp and the second at midswaps+90bp, lopping the initial guidance by 20bp at final pricing off an order book exceeding €4bn combined.

McDonald’s also visited the sterling market, printing an increased £300m in a 150-year at G+148bp with demand for the deal up at £1.5bn and final pricing some 17bp tighter than IPT. APT Pipelines also came in the sterling markets, in along 12-year for £400m at G+190bp.

PepsiCo also visited with a dual tranche €1bn, split equally between an 8-year tranche and a 120-year one. Both were priced 20bp inside the initial guidance at midswaps+40bp and midswaps+50bp, respectively.

For the year so far, we have had €65bn of issuance in the non-financial market, of which 38% of deals have come from US borrowers.

This way, then that

US retail sales might have edged a little higher in January month-on-month (+0.2%), but that doesn’t mask the dire shape of the retail sector, with December’s 1.2% estimated decline revised lower to 1.6%. Coming after that dire non-farms report last Friday, then we have a difficult picture for macro with Q1 growth numbers expected to be very disappointing across the board.

Rates were better offered until that release, but turned bid and helped push the Bund yield lower to 0.06% (-1bp), while that and Brexit fears saw the Gilt trade up and the yield decline to 1.16% (-3bp). Still, into the close the markets closed flat – buoyed on hopes that a Brexit deal might be reached at the very last minute.

Equities endured a volatile session in Europe with the Dax eventually managing to close 0.75% higher, the FTSE 0.4% and the US markets were up by over 1% as at the time of writing.

Credit index closed with Main 2.1bp lower at 62.5bp and X-Over at 284bp (-6bp). Cash credit was quiet but managed to edged tighter with spreads as measured by the IG cash iBoxx index at B+148.25bp (-0.5bp). IG credit – incredibly – has returned 2.2% (iBoxx index) year to date!

Higher beta markets closed unchanged though, the CoCo index at B+601bp – which is 110bp tighter this year though, so far. Equity direction and volatility will determine where this market goes from here. In the high yield market, we had Sappi Papier road-showing a potential €450m, 7NC3 refinancing deal serving as a distraction in an otherwise uneventful session. The cash index closed at B+458.5bp (-1bp).

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.