14th May 2019

We can work it out

iTraxx Main

65.7bp, -2.6bp

iTraxx X-Over

283.3bp, -7bp

🇩🇪 10 Yr Bund

-0.07%, unchanged

iBoxx Corp IG

B+135.6bp, +1bp

iBoxx Corp HY

B+442bp, +3bp

🇺🇸 10 Yr US T-Bond

2.42%, +1.5bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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Pragmatism returns…

First the storm, then the calm. What happens next depends on the next Trump tweet or the headlines out of China. That’s where and how policy and its response is being aired to the watching nervous global markets.

The markets should know better than respond to every Trump tweet.  He is a dealmaker and it is well-known that he uses gamesmanship for his cause.

However, if one were a corporate treasurer – whether there is a need for funding or wanting to pull the trigger on an opportunistic lift, now’s as good a time as any to go. Credit investors will be happy funding – no problem, and primary is not closed. Just look at that massive Fidelity National deal on Tuesday.

Generally, though, deals will likely see less oversubscription, tightening of pricing versus the initial price talk might be less than of Q1 and performance on the break might not see an automatic tightening. But once we get over the embarrassment of only 10-20bp final price tightening on books 2-3x subscribed and a deal unchanged or wider when free to trade, one should see that it makes sense to get the paper on board. Time to get real.

This US/China trade spat is not going to go away anytime soon. The G20 is several weeks away and the issues will linger until then. Come June 1st, the tariffs kick in. Volatility in equities will persist. A timely tweet might have us up 2% say – or down by the same amount. Credit spreads will possibly move tighter/wider in smaller increments now where the path of least resistance reflects the uncertainty elsewhere.

Our view remains that portfolio bias should be aimed for maintaining a beta in excess of 1.0. Rates are going nowhere but maybe lower – or staying low. Lower levels of growth where the macro environment doesn’t see anything like cliff event risk will also play into the credit markets’ hands. Past performance (this year) will keep money in the market and fresh funds flowing in. Higher beta risk will continue to outperform although 4% year to date in IG is definitely not too shabby!

Fidelity National Information Services took the limelight in the session in primary as it issued an 8-tranche dual currency euro/sterling deal to help finance its $34bn Worldpay acquisition. The timing was more to do with the need to get the funding on board rather than take advantage ahead of any deterioration in market conditions.

The borrower issued in 2, 4, 8, 11 and 20-year maturities in euro-denominated markets and took 6-year and 12-year finding in sterling. The issuer took 2-year fixed and floater funding for a combined €1bn at Euribor+40bp and midswaps+40bp .

The 4-year maturity was for €1.25bn costing midswaps+85bp and the 8-year offering also for €1.25bn at midswaps+125bp . In 11 years, it was €1bn at midswaps+150bp and the 20-year transaction printed at midswaps+205bp for €500m. All the tranches were priced 20bp inside the opening guidance for the €5bn of rated debt. Final books were not disclosed.

In sterling, Fidelity’s £625m 6-year tranche priced at G+175bp and the £625m 12-year leg of the deal priced at G+215bp with both 15bp inside the initial talk at final pricing.

So it looks like only US borrowers are brave enough or otherwise to try their hand in the euro-denominated debt markets given that Baxter International was the last borrower (for €1.5bn) at the end of last week. Anyway, for the month, issuance in IG non-financials for this month is now up at €13bn at the halfway stage for the month, and we’re still looking for close on €25bn – €30bn to get away. Mandates have been piling up over the past week.

The rest of the day’s deals came in the form of covered b0nds and SSA issues.

Markets dust themselves down

Elsewhere, we had Vodafone cut its dividend by 40% (usually seen as a credit positive event) to help shore up its balance sheet as it builds out its 5G network. Staying in the UK, the unemployment rate edged to its lowest level since 1974 at just 3.8% from 3.9% previously, while the employment rate remained at a record 76.1%. Earnings growth was unchanged though at 3.3%.

In Germany, the Zew indicator of economic sentiment saw a decline to -2.1 in May from 3.1 in April against expectations of 5.0, all suggesting that the assessment of the economic situation had deteriorated. It ties in with some of the poorer data we have had of late especially in manufacturing in Germany.

Still, equity markets were bouncing back. The FTSE put on 1.1%, the Dax was higher by 0.9% with US markets up by over 1%, as at the time of writing. Bitcoin’s inexorable recovery continues, now toying with $8k a coin.

Rates are doing very little for the moment and generally refusing to buy into the equity recovery. The 10-year benchmark yield on the Gilt was unchanged at 1.10%, the equivalent Treasury moved to yield 2.42% (+1.5bp) and the 10-year Bund yield was at -0.07% (unchanged).

So credit was the main focus for fixed income markets. The Fidelity deal would have been much-welcomed given the scarcity of the name (just two deals outstanding) to investors and the additional spread on offer versus other triple-B rated deals.

Unlike the recovery in other risk assets, cash credit was not really playing ball. Mind, we didn’t really see a rush for the exits previously as equity volatility pinged higher in recent sessions. The Street was less cautious but we did edge wider into the close.

The iBoxx IG cash index closed at B+135.6bp (+1bp) and despite the recovery in equities, the high yield market was also better offered for choice. The index closed at B+442bp (+3bp) – noise. Interestingly, the sterling market has not underperformed. iBoxx index spreads are 8bp in the month (+13.5bp euro IG) and total returns in the sterling market are at just -0.1% (better than the euro IG market).

Finally, in the synthetic space, we had lower protection costs as the market soothed a little. iTraxx Main Series 31 was left at 65.7bp (-2.6bp) and X-Over was 7bp lower at 283.3bp.

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.

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