13th March 2019

Wary markets

iTraxx Main

59.5bp, -1.3bp

iTraxx X-Over

271bp, -7bp

🇩🇪 10 Yr Bund

0.07%, +1bp

iBoxx Corp IG

B+144.8bp, -1.5bp

iBoxx Corp HY

B+xxxbp, -+xbp

🇺🇸 10 Yr US T-Bond

2.62%, +1bp

🇬🇧 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″]

It ain’t over just yet…

This Brexit jig is anything but over. The EU should cut the legs off from under it and refuse an Article 50 extension because if we get no deal and no Brexit – it will only be ‘for now’. There will be immense pressure for the UK to go for it all again once the political elite has dusted itself down, and it will thus be an albatross around the EU’s neck until they cede to the will of the UK people.

It was not quite the euphoric response in the markets which we might have expected. After all, the odds are now firmly in favour of taking ‘no deal’ off the table, extending Article 50 and then drifting into there being no Brexit. After all, we have certainty now, don’t we? The market should be rallying!

Alas, cynicism aside, a tsunami of immense political proportions has hit the UK. Clarity on the whole situation might not be with us for the whole fo 2019, perhaps beyond. We’re in political party split territory, potentially referendum territory and/or staring a general election in the face.

While all that plays out and we try to digest it, the markets are going to tread water. The reaction to the prevailing news flow will likely be limited given there is ongoing uncertainty. That’s just how it played out in Wednesday’s session and ahead of the next ‘no deal’ vote.

Credit, though, didn’t lose sight of there being business needing to get done. We had a triple-tranche transaction from Sanofi and it was a sufficiently low beta that parking up some cash with this blue-chip national champion was always going to see good demand. And they did just that as the issuer took €2bn off a €9bn book.

The €850m, 3-year tranche offered final pricing of midswaps+5bp which was 25bp inside the initial price talk. The 10-year, €650m leg of the deal came at midswaps+30bp – or 20bp inside the initial teaser level, while the 15-year transaction for €500m was priced at midswaps+40bp (-20bp versus IPT).

At just about the halfway point for the month, IG non-financial issuance stands at €16.2bn versus around €27bn for each of the full months of January and February. It’s not about comparing what we have seen this week or month versus the corresponding period last year, but being able to judge what the month as a whole might deliver. There is a very good chance that we exceed €20bn for the month and even get close to – or exceed – the €27bn seen in February. That’s an excellent level of deal flow.

It didn’t quite end there, as we had yet another high yield deal. Slowly, we are seeing the wheels turning in this market after a slow start to the year. Faurecia took €500m in a 6/2026-NC3 maturity structure priced to yield 3.125%. That final price reflected good support for the deal as initial pricing was in the 3.50% area.

Onto the next vote

It felt a tired old day. We had US durable goods orders for January coming in at -0.1% versus forecasts of a rise of 0.1% serving to add to the weaker data seen so far for the first quarter emerging in the US. On the flip side, US producer prices rose 01% in February after three months of declines, but still missed expectations of a 0.2% gain. On an annual basis, the rate declined to 1.9% from 2.0% in January.

There was also the small matter of an Autumn budget statement from the UK Chancellor. Weaker growth but better public finances was the message. Just as the ECB did before him, the UK growth rate was slashed from 1.6% in 2019 to 1.2% and amongst other forecasts (lower debt borrowing etc) with the Chancellor nailing his colours to taking ‘no deal’ off the table and pushed for a closer relationship with the EU.

The 10-year Gilt yield edged 2bp higher to 1.20% while the FTSE closed flat. In Germany, the benchmark 10-year Bund yield edged 0.5bp higher to 0.065% while the Dax managed to hold on to a 0.4% increase in the session. The US markets were up to 0.8% higher, as at the time of writing. Sterling was on the up, seeing a $1.32 handle versus the dollar and €1.1690 versus the euro.

In credit, the Main index saw a sub-60bp level as protection costs dropped to 59.5bp (-1.3bp) while iTraxx X-Over fell by 7bp to 271bp. As we close in on next week’s new contract roll, iTraxx Main has fallen by 30bp this year so far, with X-over lower by 90bp. Risk on in credit!

In the cash market, the Sanofi deal was most welcomed as was the Faurecia offering. Secondary was again light but better bid without too much to get excited about. The IG iBoxx cash index ended the session at B+144.8bp (-1.5bp) and almost back to the tightest level for the year, some 28bp tighter.

It was a similar story for the CoCo market, with paper scarce and better bid and the index 10bp tighter at B+579bp and closing in on the B+556bp 2019 low seen just two weeks ago. The high yield market closed with the index at B+446bp (-5bp) as this illiquid market squeezed some more.

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.