20th May 2019

When the chips are down

iTraxx Main

66.6bp, +1.7bp

iTraxx X-Over

284.1bp, +5.8bp

🇩🇪 10 Yr Bund

-0.08%, +2bp

iBoxx Corp IG

B+135.3bp, unchanged

iBoxx Corp HY

B+437.4bp, -1bp

🇺🇸 10 Yr US T-Bond

2.42%, +2bp

🇬🇧 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″]

Collateral damage a sign of things to come…

The collateral damage of the Trump order to blank Huawei on security grounds came through good and proper in the markets on Monday. What should have been – and initially looked like being – a small up or down session across the markets as they reacted to and absorb the weekend’s news flow (Aussie elections, Japanese GDP, Google/Huawei), turned into something much uglier.

Google limiting the use of its Android system on Huawei phones was the blow, but there will be bigger (negative) events to come elsewhere connected to the US security issue. Chinese state media has hit back and we’re looking at the likely escalation of the trade war.

The events around the Aussie elections, Japanese GDP and Google had kind of cancelled each other out for the early part, and we were awaiting the next headline in which to take a clear trading direction. However, the sell-off in stocks accelerated once investors took stock. Of course, it didn’t help following Trump’s tweet on ‘… the official end of Iran…’ if they threatened the US again. A miscalculation could spark a conflict with neither side looking like backing down.

Chipmakers were the ones in the crossfire, and led equity markets lower in what was otherwise a quieter session with a clear defensive tone employed through it, even if credit primary did manage to get several deals away.

It’s a ‘long’ month, and we have 2 weeks of business left albeit interrupted by the long weekend ahead. IG non-financial issuance stands at €17.8bn (+TENNET), the high yield market a disappointing €3.4bn while after Monday’s issuance, the senior issuance level is up at €5.25bn.

Last year’s full-month equivalent levels were €26bn, €4.3bn and €6.9bn, respectively. Senior issuance levels tend to wane now and we will struggle to get upwards of €8bn for any month to year end. The other two categories are going to depend on market conditions. The demand side is intact vis-a-vis investor willingness to add primary risk as portfolios remain bolstered by good levels of cash and inflows.

Market conditions are also supportive with that low rate environment adding much lure to corporate debt for a decent pick-up versus government bonds amid reduced levels of single name event risk keeping confidence in the asset class intact.

Performance hasn’t been too shabby, either, as we fleshed out in Monday’s note. We’ve given some spread back which has had an impact on benchmark investors, but the rally in the underlying has supported total returns and IG returns up at 4% are not to be scoffed at. Far from it, if that level of performance comes in by year-end, 2019 will have been seen as a fantastic year. We have a good chance of it being the case.

The higher beta markets – high yield and CoCo sectors – have also had a good time of it. The latter, as measured by the iBoxx index, has returned 7% year to date. We’ve given back 1% in returns this month but that has reflected the volatility in equities (and weakness) where the correlation between equities and AT1 risk is high.

Our view remains that biases should be retained towards a higher beta positioning, either through lower rated risk overweights and/or a slightly longer duration stance.

Primary markets early open

So we continued with deals across the two main credit markets, albeit in a limited session which is par for the course on a Monday. TenneT Holding, the national electricity transmission system operator of the Netherlands, was the sole IG non-financial issuer in the day. The group issued €500m in an 11-year green issue at midswaps+45bp and a 20-year green issue for €750m at midswaps+63bp. Final combined books came in at €6.8bn and pricing was a hefty 25-27bp inside the initial price talk.

Deal: Credit Agricole

The senior financial deals came from Credit Agricole which took €1bn in senior preferred issuance priced at midswaps+60bp (-20bp) for a long 10-year maturity. Books were a little over €2bn. NatWest Markets issued OpCo debt, also lifting €1bn in a 5-year at midswaps+110bp. The books were up at over €5.4bn and final pricing 20bp inside the initial guidance.

Worth a mention, we also had Latvia in for €300m through a tap of its 1.875% issue at midswaps+74bp.

Miscalculate and it’s war

Despite the fall in equities, there was no obvious dash for safety. In fact, we barely noticed one as rate markets were unchanged to better offered. The 10-year benchmark Bund yield closed at -0.08% (+2bp), the Gilt yield at 1.06% (+3bp) and the US Treasury in the same maturity at 2.42% (+2bp).

That might change if we get an ugly altercation in the gulf, or we get a more concrete response from the Chinese as they react to the latest situations developing around Huawei and the trade tariffs. The European elections, which start on Thursday this week seem like child’s play in comparison. They’re not, of course.

The Dax lost 1.6%, the FTSE 0.5% and US markets were down around 0.5% (S&P) while the Nasdaq gave up 1.5%, as at the time of writing.

Credit index was always going higher and rising protection costs saw Main up at the number of the beast at 66.6bp (+1.7bp) while iTraxx X-Over rose 5.8bp to 284.1bp.

There was a bit more resilience in cash where we saw only modest weakness – mainly noise, which we might have expected given the lack of volume & flow – and Street defensiveness on those declining stock markets. That left the iBoxx IG cash index unchanged at B+135.3bp. The higher beta CoCo market barely moved too, while in the high yield market did the same to close out the iBoxx index at B+437.4bp (-1bp).

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.