10th January 2019

Window wide open, no sign of a draft yet

iTraxx Main

82.5bp, -0.4bp

iTraxx X-Over

337.3bp, +1.9bp

🇩🇪 10 Yr Bund

0.20%, -2bp

iBoxx Corp IG

B+179.7bp, -+xbp

iBoxx Corp HY

B+517.7bp, +2bp

🇺🇸 10 Yr US T-Bond

2.71%, -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″]

Hype springs eternal…

Just when we thought it was safe, the old issues came back to remind us of the dangers being too presumptuous – and not get sucked into rallying markets. It is the facts that matter. The US shutdown drags on and Trump’s wall-tantrum continues and the optimism around those US-China trade talks has faded. The latter was the driver for much of this week’s upbeat tone.

The gamut of economic data from the Eurozone continues to highlight that the economy’s manufacturing activity faded badly in the final quarter – this time French industrial output for November showing a 1.3% monthly slide versus expectations of no change. The markets reacted, but actually in quite measured fashion for equities, as rates were much better bid for the most part.

So the new year opening rally almost came to an end, only saved by a choppy US market managing to recover losses of almost 1% as we closed in Europe. There were some spectacular moves in equities on the back some single name risks (see below). The failure for the trade talks to not deliver, as well as the US government shutdown heading into another week, were probably to be expected and seemed to have little bearing on the day’s market moves. Few (Trump, Democrats, trade negotiators) are yielding much ground.

Yet the underlying macro situation continues to be weak and weakening, while policymakers fiddle around the edges in a ‘Rome is burning’-like dynamic, so to say. Those French manufacturing numbers were added to as UK retailing experienced its worst Christmas holiday period in a decade – and later by Macy’s (its stock was hammered). American Airlines also issued a profits warning which saw that sector under pressure. Overnight, we had Chinese factory gate inflation at a 2-year low and CPI at a 6-month low – both in December.

We are still anticipating a poor set of macro data for the first quarter and think the policy response in Europe will be to hold tight and try and let stall play out. That’s certainly how they played it in December, with the release of the ECB’s minutes suggesting a refrain from downgrading its economic outlook. They came close to it, though, and we would think the next meeting might tip them over the edge. In the US, a more dovish Fed will only offer a delay in the next rate hike.

In credit, it rained deals again, but let’s not carried away. Some investors actually didn’t as Deutsche Pfandbriefbank senior preferred offering was pulled. The deal flow this week has been massive, though, although it has been the result of a wave of covered bond deals and SSA issuance. Corporate bond transactions have been higher than we might have expected given the previous background noise and credit market weakness, and we have had more effusive January markets in the past. On many occasions.

Primary still dealing

The mood in the primary market remains upbeat, with no one disturbed by the Deutsche PBB deal being pulled. The window is open, the going is good, and we ought to be seeing much more on the corporate bond front while it lasts. The slightly ‘juicier’ deals this week have been the one’s attracting significant order books, suggesting yield buyers (in IG) are still extremely needy.

Fresenius’ deal was extremely well received. As we might have expected. Despite some earnings concerns, they are a very well-regarded company. They took €1bn split equally between 6-year and 10-year maturities priced at midswaps+165bp and midswaps+215bp, respectively. The combined books were up at €7bn skewed more towards the shorter maturity with final pricing reduced by 15-20bp versus the initial guidance.

ArcelorMittal took €750m in a 5-year offering at midswaps+210bp, where a €4.2bn book allowed the leads to cull the finalist to the borrower by 30bp, versus that inital guidance. Away from the low triple-B area, APRR SA issued €500m in a 9-year maturity at midswaps+65bp, off a €1.2bn subscribed book and 15bp inside the opening mumble.

That’s a good tally of IG non-financial deals, some €9.4bn from 14 tranches and 10 borrowers.

We had a similar picture in senior offerings as banks continue to issue heavily. Santander Consumer Bank lifted €500m at midswaps+97bp (3-year), Credit Mutuel Arkea pared midswaps+110 for €500m in 6-year funding and CaixaBank printed €1bn in a 5-year maturity at midswaps+225bp (with €2.6bn of orders).

With just a session to go this week – likely a quieter one – the deal flow has been very good, with €9.4bn of IG non-financial offerings, €11bn of senior debt printed with Telecom Italia Mobile’s €1.25bn deal opening the account for the year in the HY market.

Rangebound session

So we managed to close in the black in European equities having held in negative territory for most of the session, as always pulled up by the recovering equity market in the US (which was almost 1% lower at the open).

Rates remained better bid through the session and the Bund yield in the 10-year declined to 0.20% (-2bp) and US Treasuries were yielding 2.71% (-2bp), at the time of writing. The session here was rather uneventful.

In credit, the indices exhibited a quieter more stable outlook for the day, to be expected given the lack of drama or otherwise in equities. iTraxx Main was just 0.4bp lower at 82.5bp at the close, with X-Over almost 2bp higher at 337.3bp.

IG credit in secondary closed completely unchanged. So far this year, it has failed to offer any upside and at B+179.7bp it is already over 7bp wider. Higher beta didn’t too much either, and the HY index was left B+517.7bp (+2bp) – just 6bp tighter this year. High beta credit valuations in the main move with market sentiment and tone which are driven by equities. The worrying data point is that IG one, highlighting the relative the weakness in IG risk given equities, say in Europe, are up 3%.

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.