16th November 2017

We’re back, 1000 year deals and all

iTraxx Main

52.1bp, -1.1bp

iTraxx X-Over

243.4bp, -6.4bp

10 Yr Bund

0.37%, -1bp

iBoxx Corp IG

B+101.2bp, -1.2bp

iBoxx Corp HY

B+287bp, -9bp

10 Yr US T-Bond

2.36%, +3bp

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″]

All is not lost…

Just when all looked hopeless, the tide did turn. We are back. Higher equities, flattish in duration and tighter credit spreads. It’s been a while (!) since we could last say any of that. The illiquidity in the offered side of the market ensured we squeezed better as buyers emerged and newer issues which had been underperforming of late were beginning to look in better shape.

Short covering, bottom fishing or just investors looking to add paper they perhaps didn’t buy in primary because the market looked too rich – we’ll take any or all of those as the reason for the better market. We still had a fairly active primary market on Thursday, although the lower volume of issuance was not the reason for the better bid (as that had emerged at the end of the previous session).

It hasn’t been a great month for performance. Equities have led the way in ensuring sentiment towards risk assets everywhere was weaker, and credit’s perceived richness was always going to see to it that we had a ‘reflective’ pull back. Secondary turnover levels certainly didn’t suggest we ought to get the kind of spread weakness we saw, it’s just that the Street took a defensive bias on any investor selling enquiry. Liquidity, or the lack of it, in secondary is unhelpful at the best of times.

For example, we saw the historical tights in most credit sectors just under two weeks ago – the iBoxx HY index tightened to B+254bp and the CoCo index at B+351bp – but we recoiled hard and fast. We added 40bp to the HY index and 63bp to the CoCo index during that period of weakness. There was not an average of 50bp of selling pressure in the market.

Nevertheless, based on those numbers the high yield market had lost 0.8% in November to Wednesday’s close (and before Thursday’s little recovery), while the IG market had lost just 0.25% which we would expect given its lower beta status and more defensive nature. We would expect all of those numbers to look much better by the end of the month.

The better session on Thursday allowed us to make good moves in terms of a recovery and a grind – or more – back towards those historic tights. The frustration in trying to add through secondary is palpable with a barely cooperative Street offering scant liquidity.

Primary flurry into bullish tone

€500m deal: France’s Veolia Environnement

The primary market was gushing with deals. The overall volumes might have lagged behind some of the more effusive sessions of late, but there were plenty of borrowers getting their deals on the screens.

Ørsted (formerly DONG energy) was the most interesting deal as it paid 2.375% for a 1,000-year NC7 (basically a PNC7) green hybrid issue for €500m, taking €2.4bn of orders in the process and lopping 37.5bp off the initial yield guidance. They also plumped for a 12-year maturity green bond for €750m priced finally at midswaps+57bp (-13bp versus IPT).

Rentokil Initial, absent for the best part of three years from the market, returned with a €400m, 7-year offering priced at midswaps+55bp (-20bp versus IPT) on a book of €1.7bn. The final IG non-financial deal in the session came from Veolia Environnement for €500m in a shorter 3-year transaction at midswaps+5bp (-15bp versus the initial talk).

The IG non-financial total has now passed the €250bn mark for the year to date, with almost €23bn issued this month and €10bn of it this week.

In senior financials, we had Westpac (€500m green bond, 7-year) and BNP Paribas for €1bn in senior, non-preferred format and in a long 10-year transaction. The sterling market contended with Principality BS for £300m and a Sainsbury’s Bank £175m 10NC5 deal. Elsewhere, leading group ALD SA lifted €600m and property investment group Nepi Rockcastle took €500m. The other deal of note was Croatia‘s €1.275bn 12-year offering priced at midswaps+190bp.

More of the same, please!

The day’s main data event was the rebound in US industrial production in October which wiped out the weakness coming on the back of the hurricane season. That, and a decent round of earnings helped propel US industrial stocks higher by up to 0.9% while the Nasdaq added 1.4%. European stocks were up to 0.75% higher.

As for rate markets, there was little change. Benchmark 10-year Gilts were yielding 1.30% (+2bp), the Bund was unchanged to yield 0.37% although US Treasuries were yielding 2.36% (+3bp, 10-year).The synthetic indices saw some recovery as well with iTraxx Main lower at 52.1bp (-1.1bp) and X-Over dropped to 243.4bp (-6.4bp).

In the cash market, the late recovery in spreads into Wednesday’s close was reflected again in Thursday’s session, despite the decent flow of deals in primary. The Market iBoxx index squeezed a little and closed at B+101.2bp (-1.2bp) while the higher beta CoCo index squeezed much more – by 20bp! It closed at B+394bp and the level of that tightening highlights really well the lack of liquidity in this market (and corporate bond markets generally).

The bottom-fishing investors’ bid was there trying to pick off ‘cheaper’ paper, the inventory in the Street wasn’t, though, and the screen price didn’t really work. It rarely does.  As for the corporate high yield market, it was much the same really with the index 9bp tighter at B+287bp – and on the road to recovery, with little flow to underpin anything.

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.