16th April 2019

Inflows, demand, reduced primary, illiquidity…. squeeze

iTraxx Main

58bp, +0.1bp

iTraxx X-Over

249.1bp, +1.4bp

🇩🇪 10 Yr Bund

0.06%, unchanged

iBoxx Corp IG

B+127.7bp, -1bp

iBoxx Corp HY

B+392.7bp, -3bp

🇺🇸 10 Yr US T-Bond

2.58%, +3bp

🇬🇧 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″]

Credit bagging performance…

It appears as if the Easter holidays are already with us and are acting as limiter on activity after a breakneck start to the year, against the expectations of most. The Dax is up by close on 15%, the S&P a good session’s trading away from a fresh record high, just as euro-denominated IG credit sits on returns of almost 3.5% year to date – with spreads (iBoxx) 45bp tighter.

We happen to believe that there is much life in the primary credit markets (witness demand for Sika Capital deal) right up until Thursday – ahead of the long weekend, and then immediately after from next Tuesday onwards. However, after a better-than-expected €95bn of IG non-financial issuance in the year to date, it could be that we are seeing a slowdown reflecting issuers probably having brought forward deals they might have been looking to do later.

The conditions (declining rates/funding costs/demand) were, after all, too good an opportunity to have passed up. Let’s see.

So the Sika deal on Monday managed to build interest of €10bn+ for the €1bn dual-tranche offering and is clearly telling the market that demand for corporate bond paper remains at a very high level. It is unusual to be seeing deals get high level of oversubscription – and to do so consistently. New offerings 4-5x or more subscribed have become commonplace this year, and comes from investors needing to get their cash invested as inflows have been at a high level.

The trigger has been the weakness in macro and the change (sudden in the case of the Fed) of central policy as it shifts towards a more dovish stance. That has pushed rates (generally) lower and fed into the demand for corporate bond risk, as the asset class offers a fixed income investment with better returns than government bonds with little or no appreciable concerns that the default risk might rise (at the moment anyway).

Just look at those high yield numbers. Total returns as measured by the iBoxx index are up at 6.5% year to date, and index spread at B+392.7bp – which is 131bp tighter in 2019. At the beginning of the year, 3% returns and 50bp of tightening would have been a good result for such a transitory 2019 amid nervousness around the macro outlook, Trump, Brexit and the various political situations that were (are) developing.

Instead, higher beta risk has been embraced, just like it was in 2016/2017, amid the fall in rates and also because of those aforementioned situations. As long as the default rate and single name event risk remain low/subdued, then cash is going to find a way into corporate bond funds and into supporting the credit market.

The pace of the tightening is unrelenting. The HY market is 48bp tighter this month already, versus 11bp of tightening for the IG index – and we are a whopping 66bp tighter in the AT1 market (176bp year to date) and returns are up at a stunning 7.9%!

Primary slowing

It was another quieter session, with the sole IG non-financial corporate being French supermarket group/retailer Auchan, which came with a 6-year, €1bn transaction priced at midswaps+225bp. That was 25bp inside the initial guidance and made possible because the book was in the now almost expected 3-4x oversubscription range – at €3.4bn. That’s €12bn of issuance now for the month and closing in on that €100bn for the year so far, as we reside at €96.5bn.

In senior financials, TD Bank took €1.5bn in a 5-year at midswaps+38bp and was also met with excellent demand with books up at €4.5bn and final pricing reduced by 22bp versus the initial guidance.

And, to complete the session, in the high yield market Warner Music Group tapped the 3.625% 2026 issue for a further €195m, taking the total deal size to €445m.

Earnings decent, markets poised

The markets delivered up a mixed set of data. In Germany, the latest Zew survey’s economic sentiment indicator rose to 3.1 in April from -3.6 in March, suggesting that there was some hope of an improvement in macro. In the US, industrial production fell in March by 0.1% month-on-month, against expectations for a 0.2% increase.

On the earnings front, BlackRock saw strength in performance (not totally unexpected!) with AUM up at $6.5trn. J&J also topped expectations as sales and earnings beat estimates. More difficult markets affected investment banking for BofA, but retail banking helped as an offset and they beat expectations by a small amount. Brexit or not, in the UK, unemployment hit a 45-year low.

Equities closed the session in Europe by up to 0.7% higher while in the US they were also pushing on, but by a lesser amount (up to o.4% as at the time of writing). No doubt they are gaining some confidence from the earnings season which thus far is not disappointing as thought.

Rates did very little except to give some back in the US, the 10-year Treasury yielding 2.58% (+3bp) with the Bund in the same maturity unchanged to yield 0.066% and the Gilt left at 1.22%.

Credit index was just about unchanged with iTraxx Main at 58bp and X-Over closing at 249.1bp (+1.4bp).

As for cash, the wind down for Easter has started in earnest. A quiet session amid a positive backdrop left a continuation of the squeeze in valuations we have been used to of late. It left the cash IG iBoxx index at B+127.7bp (-1bp) and the high yield index at B+392.7bp (-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.