15th November 2017

Waiting for the tide to turn

iTraxx Main

53.2bp, +0.6bp

iTraxx X-Over

250.0bp, +0.8bp

10 Yr Bund

0.38%, -2bp

iBoxx Corp IG

B+102.4bp, +3bp

iBoxx Corp HY

B+282.9bp, +6.5bp

10 Yr US T-Bond

2.34%, -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″]

As the jitters persist…

We were again greeted by a sea of red across the screens. Those equity markets just don’t want to shake off the feeling that we have probably gone too far on nothing but excess liquidity. So we’re getting a period where the pull-back from those heady heights in all markets is a little more persistent than we might have liked.

There’s no worrying 1.5-2%+ like falls, but just that 0.3-1% daily drop which leaks away performance, but as importantly it starts to weigh on investors. And then the darling of the third quarter starts to tumble – commodities. It’s like there is a restraining order and the path of least resistance in such circumstances is to give up some more. Until we get a reason to buy. There’s little fresh news flow to suggest that, although we are watching the US tax reform situation closely.

In credit, the corporate bond market is also leaking away some performance. But we’re happy to buy (in primary only) as evidenced by the €20bn+ of IG deals in the market already this month. And the current crop of deals where the market can easily absorb €4-5bn a session without any obvious indigestion.

There is considerable cash waiting to be invested and borrowers are finally feeding into it. For Wednesday, it was the turn of Vodafone with a 3-tranche effort just a day after BT did the same (but in sterling and euros). Back in the summer, Vodafone’s last visit this year gained many plaudits as they went out with fairly definite pricing from the start (€500m, 10-year at midswaps+62bp) – not playing the game around ramming in that initial guidance by 15-20bp after enticing investors with cheap price talk. Not for them!

Well, they fell back into the market norm with their three tranche deal which took in 8, 12 and 20-year maturities. The rationale for the telecom giant’s change in pricing dynamic would be that there are three tranches and there are a couple of longer dated tranches. Against? Take out the 15-20bp ‘cheap talk’ – don’t change the price/stay in the ‘range’ – and really make a stand against the mockery of the pricing regime. After all, it isn’t as if a borrower like Vodafone has many issues around price transparency. In the event, the issuer took between 15-17bp off the opening pricing indications for their deals.

We should probably stop thinking in terms of a New Issue Premium (NIP), and start thinking instead about a SMP (Secondary Market Premium). That it, the premium is not in new issues but in the secondary curve, courtesy of the ECB.

Primary slows, but there is enough

Vodafone’s €2.5bn took all the IG limelight on Wednesday

As discussed, Vodafone took centre stage in the session. The 8, 12 and 20-year maturities were finally priced at midswaps+65bp, +97bp and +157bp, respectively. The borrower lifted €2.5bn for their troubles.

The deal was seen as cheap to the secondary curve, but the relevance of the secondary curve has long been irrelevant given the distortion of the market by the ECB’s QE purchases – as highlighted above. Still, the borrower managed to gain an order book of just over €5.5bn which wasn’t too bad given the low beta nature of the offerings.

So, we’re up at €20.8bn of issuance for the month so far now, in IG non-financials, with €8bn of that coming this week so far, and with two session still to go. For the year to date, that takes us to €249bn with little sign of a slow down although with secondary performance waning, it might just slow down the rate of supply as some investors might be reluctant to put as much to work as they have been.

In the high yield sector, crossover credit Gazprom took €750m in a 7-year deal, priced to yield 2.25% which pushed HY issuance to €4bn for the month at the halfway stage, and to €66bn for the year so far. That’s €9bn more already when measured against the previous record set in 2014, of €57bn.

In sterling, we had Nordic Investment Bank (£300m) and Places for People Homes (£250m) pit their wares.

Cash credit underperforms

On the economic front, the latest UK unemployment release saw that the rate had stabilised at 4.3% while real wages continued to decline (by 0.4%). In the US, producer prices rose year on year to 1.8% in October from 1.7% in September, while retail sales rose by 0.2% in October versus September (topping estimates of flat). The equity markets spent the session off by up to 1.3% (the Dax a little more), probably not helped by euro currency strength, before recovering to close lower by up to 0.5% and that included in the US.

Government bonds were better bid, pushing down market rates by some margin – but we closed off the session lows. Benchmark 10-year Gilt yields declined to 1.28% (-8bp), we had the 10-year Bund yield drop to 0.38% (-2bp) while even US Treasuries saw yields fall by 5bp to 2.33%, before closing at around 2.34%.

Synthetic credit protection costs rose only moderately, such that iTraxx Main was up at 53.2bp (+0.6bp) while X-Over performed better, up just 0.8bp to 250.0bp.

In the cash market, we had an opportunity to consolidate given the amount of supply we have had to absorb of late, and with just the Vodafone deal to contend with in IG.

The cash market underperformed. The Markit iBoxx IG cash index rose by almost 3bp to B+102.4bp, and is now 7bp wider this month. The weakness in spreads was evident across the board, the CoCo index wider by 14bp (now at B+414bp) and the high yield index at B+282.9bp (+6.5bp).

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.