7th June 2018

Week just passes us by

iTraxx Main

72.9bp, +3.2bp

iTraxx X-Over

306.1bp, +6bp

🇩🇪 10 Yr Bund

0.49%, +3bp

iBoxx Corp IG

B+127bp, unchanged

iBoxx Corp HY

B+374bp, -1.5bp

🇺🇸 10 Yr US T-Bond

2.91%, -6bp

🇬🇧 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=”15″], [wp_live_scraper id=”16″]

Rate markets setting the agenda now…

The ‘relentless’ rise in Bund yields shows little sign of abating. Well, it feels relentless given that the 10-year yield has jumped by over 20bp in the last week! Even the poor German factory orders for April, where a drop of 2.5% was recorded versus March – and the fourth decline in orders in a row, failed to halt the sell-off in rate markets. Clearly, the market has interpreted comments from ECB board members on Wednesday that the QE bond purchase programme will come to an end by the end of the year. And the market is fretting.

It’s coming just when the growth dynamic across the Eurozone has hit a sustained poorer period with much uncertainty still into a potential summer of discontent on the trade tariff front. Inflation is barely showing signs of a relentless rise and is still well-below official targets. The Italians are an unknown, too, at this moment as the EU/Eurozone is grappling with an existential crisis with recalcitrant countries on several fronts.

It’s clear that the ECB needs to ween the financial system off the support it has much needed and enjoyed over the past decade, but the timing looks a little precarious for expecting an ending to the QE programme while the aforementioned event risk situations could tip the balance towards another crushing downturn and/or financial system panic. Now is the time for extreme vigilance and caution, because the worst could happen.

So, QE or not, we still do not expect the 10-year benchmark Bund yield to hit 1% this year and suspect it finds a level somewhere between 0.4 – 0.7% depending on the prevailing news flow. It was less than a fortnight ago that it was as low as 0.19% intraday as panic set in following the breakdown in talks of a new Italian government. The 5-year Bund yield was as low as -0.40% but is now at -0.12% having been in positive territory during the first quarter on expectations that the Eurozone economy was in rude health. It isn’t.

Equities spent another session treading water, doing very little as the market lacked the will to move with any conviction. There’s nothing curious about that, but there is some head-scratching around what’s happening in the corporate bond market. Admittedly the market is fearful about Italy, but no longer is it dumping paper like it was in extremis last week. We know that rates have backed up, and go some more, but the primary market feels closed. It shouldn’t be. The demand is there and there is a new pricing regime needing to be considered (higher new issue premiums, that is).

The pipeline is rammed. We know Bayer is due soon enough and will dominate when they finally pull the trigger with a blockbuster multi-tranche cheap offering to fund the Monsanto acquisition. Other borrowers should be looking to get in ahead of that deal hitting the screens. Otherwise, there might be more of a ‘price taking’ dynamic than there already is in the immediate aftermath of such a deal, as a mega-jumbo Bayer transaction could reprice the market significantly.

Primary still threatening a storm

The pipeline continues to build and threatens to burst unleashing a torrent of deals this month before we head into the summer months. Unfortunately, it will be next week now that sees that eventuality. We hope.

Thursday’s primary activity was relatively light again, which in IG non-financials took in Knorr-Bremse for €750m in a 7-year at midswaps+50bp, garnering a book of over €2bn which allowed pricing to be bettered by 15bp versus the initial price talk for this mid-single A rated German group.

Following on from Carrefour SA’s deal earlier this week, the group’s bank (aptly named Carrefour Banque) issued a 4-year €400m floater at Euribor+62bp taking 18bp off the initial guidance, from books in excess of €1.2bn.

The tally for June in the non-financial primary market moved up to €3.7bn – but unusually so, for this time of the year’s proceedings, we have still not broken through the €100bn barrier. The year to date total is at an unnervingly low €98.8bn:

NatWest was the other borrower of note with a senior €500m, 5-year deal priced at midswaps+85bp (-10bp versus IPT, books around €1bn).

Weekend feeling comes early

Into the close, European equities were down in a -0.2% like context. Rate markets also managed to close off the lows (prices) and yields settled at just being slightly higher for choice, in the session. The 10-year Gilt was at 1.40% (+3bp), the Bund in the same maturity at 0.49% (+3bp) while the Italian BTP was yielding 3.02% (+3bp). It’s been a couple of days now where the markets have felt extremely lethargic, they might not on Friday!

Because in the US, the 10-year Treasury was flattish at around 2.97% for most of the session, before a late bid emerged pushing the yield lower to 2.91% (-6bp) at the time of writing!

As for synthetic credit, protection costs jumped higher leaving the iTraxx indices with Main at 72.9bp (+3.2bp) and X-Over 6bp higher at 306.1bp. The truce over the past couple of days coming to an abrupt end.

In cash, we’re sitting on our hands. Primary has threatened but failed to deliver. So secondary isn’t going to do much especially in the absence of any fresh news flow to either get excited or to fret about. We closed unchanged, the iBoxx index at B+127bp – and the CoCo index the same – which in itself is a sign already of a more pragmatic feeling in the cash market. The ‘loose holders’ (those who panicked last week) are fewer now.

And it was the same in the high yield market, with primary drawing a blank and secondary barely moved, the index left at B+375bp (-1.5bp).

Maybe credit has finally regained its poise.

Have a good day.

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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.