18th March 2018

Yes, we can!

iTraxx Main

51.6bp, +1.4bp

iTraxx X-Over

250.9bp, -4.4bp

10 Yr Bund

0.57%, -1bp

iBoxx Corp IG

B+99.7bp, +0.8bp

iBoxx Corp HY

B+315bp, unchanged

10 Yr US T-Bond

2.85%, +2.5bp

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″]

And we will…

Just about €17bn of IG non-financial corporate bond issuance last week after just €5bn in the opening week and a half of March, and of course the market was going to feel a bit of indigestion. We wouldn’t necessarily think that there was a material push back by investors, but a short period (of just a day or two) of zero or lower levels of issuance will set the market up for the next, potentially heavier batch of supply. The market can absorb a lot more.

After all, the opening quarter – with two weeks of business left – has seen just €51bn of deals versus an average in excess of €75bn over the previous four years’ first quarters. And €40bn+ in March is not unusual, although we don’t believe that is going to happen this time despite the pace that’s been set. Here are those IG non-financial corporate bond issuance numbers:

We would think that the Sanofi and Richemont deals might have taken a few by surprise because of their sheer size (€8bn and €3.75bn, respectively) – as well as following each other quick-fire in successive days, but the order books suggest that the demand was there. In addition, there were deals in subordinated financials and senior bank debt aplenty (€10bn of the latter last week) while the high yield market also chipped in with €3.5bn of issuance.  Of that high yield rated supply, €2.25bn was from Telefonica in a dual tranche hybrid format and this would have appealed mostly to the IG investor base. So overall, a lot of corporate bond deals last week, but nothing to worry about. And really, it can’t be THAT bad – Russia printed in dollars ($4bn of them on Friday)!

Performance of deals hasn’t helped, either, as many deals are a little soggy on the break. Nor has it helped in that we have had that unsavoury Russian nerve gas episode, which has taken in NATO and so on, so geopolitics have injected some uncertainty into markets. The economic data of late in both the Eurozone and US has suggested a moderate pullback in activity. Some concern is still lingering around Trump’s steel tariff regime as the EU awaits clarification regarding potential exemptions. Equities have been choppier than we might have hoped for, while a bid has re-emerged for duration risk where the yield on the 10-year Bund has dropped to below 0.60% (currently at 0.58%) from 0.81% several weeks ago.

So the stars are not quite fully aligned for anyone to feel they should be adding copious levels of risk (corporate bonds), but we are adding as those cash balances need investing. And if the market starts to feel bloated, and borrowers need – or feel the need to pull the trigger – they will just pay up for the privilege. It’s easy.

Cash credit spreads under pressure

There is no denying that IG spreads have widened this past week, and by more than anyone would like. And that weakness in spreads will have come about because of the welter of issuance seen in that midweek, two-day flurry as mentioned above. Cash credit in IG, as measured by the Markit iBoxx index, widened by another 0.8bp on Friday leaving the index at B+99.7bp.

That’s 8.5bp wider for this index in the last week alone and 4bp of it came in the midweek period when Sanofi and Richemont were printing almost €12bn between them. Some might have been lightening up other positions readying for these deals, but more likely we think Street apprehension and defensiveness into the high level of issuance in such a short time – which might subsequently have led to some better investor selling enquiry.

The latter point is demonstrated by the fact that HY credit closed Friday’s session completely unchanged at B+315bp for the final index mark, leaving it only 10bp wider in the week. The same goes for the CoCo index, also completely unchanged at B+354bp on Friday, but 30bp wider for the week as a whole. All the weakness in these markets also came midweek.

So, we do think that spreads will recover some of the current weakness, amid little or no reason from a technical or fundamental perspective to widen – and that includes the heavy primary market. The demand for paper is very solid. The IG credit index is only 3bp wider YTD – but has backed up 17bp off the end January record tight!

Sombre’ish mood ends week

Friday’s session was a light one with little impetus to get involved by investors. in the US, there was an element of weariness, affected by the ongoing tariff situation, the Broadcom/Qualcomm deal (or not, rather) and then we have this week’s FOMC to look forward to. Nevertheless, equities were higher in the session, without showing off anything spectacular although the mood might be set into that Fed meeting. All the ‘three hikes or four’ chatter is bound to dominate until the decision and/or communique is delivered, on Wednesday. The 10-year US Treasury yield rose 2bp to close the week at 2.85%.

Rates were close to unchanged in the session, but as already mentioned, they are well off the highs in Europe we saw a few week ago, in yield terms. While the front-end isn’t doing too much, the 2-year Bund yield at -0.57% and the 5-year dipping in out of negative yield territory (-0.03% now) still leaves cash as expensive, hence the good demand for short dated corporate risk (in new issue).

iTraxx Series 29 index roll dynamics were having an impact on the direction of the indices as Main moved 1.4bp higher to 51.6bp while X-Over was lower at 250.9bp (-4.4bp). A full list of the ins/outs for the new index versus the old (S28) are available on the Markit website. For example, ‘out of X-Over’ are Anglo American, Ceconomy AG, CNH, Galp Energia, Metsa Board, New Look Senior, Schaeffler, Smurfit Kappa Acquisitions, Store Enso Techem, Trionista and Wind Acquisition. In go Wind Tre, TDC, Adler Real Estate, Algeco Scotsman, Bevco Lux, Crown European, Dufry One, Europcar Groupe, Nidda Healthcare, Picard Bondco, Steinhoff Europe and Verisure Midholding.

So next week has the market focused on the FOMC and the pace of tightening for this year (with a 25bp hike expected on Wednesday). The BoE is also meeting, but no change is expected while we look for clues as to a rise in rates in May. The EU Brexit summit concludes the week’s major policy flow on Thursday/Friday.

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.