17th May 2018

Worry wall

iTraxx Main

56.5bp, +0.1bp

iTraxx X-Over

272.7bp, -2.3bp

🇩🇪 10 Yr Bund

0.64%, +2bp

iBoxx Corp IG

B+108.5bp, +0.5bp

iBoxx Corp HY

B+326.7bp, -1bp

🇺🇸 10 Yr US T-Bond

3.11%, +1bp

🇬🇧 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″]

Wall of worry rises…

Market rates have shot higher – especially in the US – on the back of expectations of improving macro and tightening job markets feeling a necessary rise in inflation, and allowing the Fed to try and bring policy as close to normal as it can. We’re being dragged higher in the Eurozone even as growth splutters and inflation remains anchored at very low levels.

The differential in rates between the US and Eurozone is increasing. Credit spreads are not tightening even as the ECB lifts what seems to be any semblance of secondary market liquidity (and back up to circa €1bn a week as judged by the last several weeks) and against a primary market which, until this week, flattered to deceive.

As for primary, we’ve had the poorest opening five months for many a year. We’ve trotted out reasons why that might be the case in many previous notes from bloated liquid balance sheets, to reinvestment risk to geopolitical and macro event risk. Either way, the weakening IG non-financial supply dynamic has been a difficult one to assess. Even equities have staged a good recovery and we are not far from record highs (less than 3%) in most markets, even if we have recovered of late all too unconvincingly.

That’s against the growing fear of a potential for a non-market friendly coalition government taking control in Italy. Debt forgiveness or upsetting the Brussels gravy train isn’t going to be market friendly, but we had no lurch higher in BTP yields in Thursday’s session, not yet threatening a rout of the country’s bond markets as investors might take fright. The 10-year yield is now up at 2.17% (+8bp) and up 25bp this week already.

The North Korean/US love-in has hit a difficult patch and we’re going to need some good work in the background to repair the tiff which seems to have developed. And then we have the US/Iranian situation which has become a boon for the oil markets, leaving Brent up to trade off a $80 per barrel handle (almost +$10 in the last month).

It would appear that once again, we have a wall of worry that we need to climb. In theory, we are in a good place as investors across the different markets and asset classes are being cautious (staying liquid and defensive), which means they’re not being fully invested. So we can go higher in all asset classes. We just need some of the aforementioned situations to show some sort of a workable solution, or a compromise to be reached. If so, record equities and tighter spreads (again) are in sight. While bond market yields look like they’re going to be rising.

Bertelsmann headlines in primary

Well, well, well. A major pushback in primary in the session greeted us. And the German media group Bertelsmann was in the thick it. The borrower went out with a €500m 7-year maturity with initial price talk of midswaps+45bp which was a new issue premium (NIP) of around 20bp versus a hugely manipulated secondary curve. ‘Final terms’ were unchanged and no book update was given. The deal was shortly thereafter pulled.

What to think? As suggested, the  secondary curve is a manipulated curve and now every bond is a “special” situation driven by technicals derived from the QE-related ECB corporate bond purchases. That secondary curve doesn’t define “value” for a third party investor, so issuers shouldn’t get so “focussed” on the NIP, but look at the bigger picture and answer the question as to whether the market is giving them good funding or not?

The issuer would have been ‘happy’ to have taken midswaps+45bp for the 7-year deal, after all they gave permission for the leads to set ‘final terms’. We would think that the book wasn’t strong enough and investors may have got a little nervous at the lack of information about the size and quality of the book – and shied away. No update. No tightening. No demand. No deal!

One deal that did get away much more smoothly was the G4S PLC offering for €550m at midswaps+120bp for a 7-year maturity. The pricing was tightened versus the initial guidance by 20bp and the book was 4x subscribed.

In X-over territory, US corporate Becton, Dickinson and Co was in for €300m in a 5-year at around midswaps+95bp, while also debuting in the sterling market with a £250m 7-year issue as well. Still to be priced. In high yield was Kraton Polymers’ €290m 8NC3 senior notes, priced at 5.25%.

The other deal of note was French real estate group Societe Fonciere Lyonnaise‘s €500m 7-year offering at midswaps+88bp.

Subdued markets ending week

So with all the geopolitics to have to wade through aligned with the higher market rate environment, there was bit of a dampener on proceedings in the session. Rate markets endured a choppier time of it, leaving the 10-year US Treasury yield at 3.11%, (+1bp) the Bund to yield 0.64% (+2bp) and the Gilt 1.56% (+6bp). There was less focus on Italy, and 10-year BTPs yields were close on unchanged at the close, at 2.11% (+1bp).

Equities in Europe were in the black by up to 0.9%, while in the US they were struggling for direction and lower (as at the time of writing). It’s worth noting that the FTSE ended 0.7% higher and is now just a handful of points away from record highs, closing at 7,787.5 (record high being 7,792).

Credit’s brouhaha was around the Bertlesmann issue. Secondary though didn’t do much, save for some weakness in Bertelsmann debt (by 5 – 10bp). The high yield market was a touch better, amid little activity and the iBoxx index was left at B+326.7bp (-1bp). The IG credit index was effectively unchanged at around B+108.5bp.

Finally, the synthetic market clawed back some of Wednesday’s weakness in X-over with the index 2.3bp lower at 272.7bp and Main unchanged at 56.5bp.

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.