IFR SNAPSHOT-Volatility, inversion roil markets

10 min read
EMEA
John J. Doran

Tuesday’s recovery did not last long as volatility returned with a vengeance on Wednesday, triggered by an assortment of spurs including a recession signal not seen in 12 years.

Yes, the 2-year and the 10-year note yields inverted on the curve today for a brief time before un-inverting - just barely. The move has signaled the coming of recessions in the past and was enough to push already weary markets downward.

However, whether a recession does in fact transpire in the near future is still an uncertainty, as trade and tariff talk turmoil is considered one of the main culprits in pushing the recession warning. The tariffs on imported Chinese products would drive up consumer prices, as well as input costs for industries, which could slow the economy and output.

As a result of Wednesday’s turmoil, the investment grade corporate bond market almost idle - with the exception of a junk rated AT1 dollar offering from Credit Suisse, which was announced earlier in London.

Oddly enough, issuers braved similar markets last week and on Monday this week. But today is proving too volatile.

The Dow index was down over 400 points at 10:00am New York time. And the US Treasury yields on the long end were moving down, with the 30-year bond hovering above 2%.

And at 09:45am the COX IG.32 was wider by 3.5bp and the COX HY.32 was 3/4 of a point lower.

In the ING primary on Tuesday, six deals priced totaling US$9.95bn, pushing weekly supply to US$21.05bn and monthly issuance to US$62.446bn.

HIGH GRADE

Except for the AT1 offerings, there are no IG issuers expected in the primary as fears of a coming recession ramped up.

“When the all in corporate bond yield is re-testing its lows it tends to pull supply forward if you’re a corporate entity that has some financing to do,” said Scott Kimball, portfolio manager at BMO Global Asset Management.

Some reprieve from the uncertain markets was delivered yesterday when President Donald Trump announced a delay to tariffs on various tech goods coming from China until mid December.

That bit of good news was enough to push Credit Suisse Group to offer a US-dollar perpetual non-call seven year Additional Tier 1 note overnight. nL8N25A22S

But the tone quickly turned negative when the two-year and 10-year Treasury yields inverted, sending spreads mildly wider.

For example, Exxon Mobil and UPS priced sizable bonds on Tuesday but were widening by 1bp-4bp as some of the most active bonds in the secondary market this morning, according to Market data.

Additionally, Macy’s poor earnings performance plunged its stock price and is sparking fears of a downgrade to junk from its Baa3/BBB-/BBB ratings.

The retailer’s 4.375% 2023 bond was the company’s most active in the secondary today, trading around 10bp to 30bp wider, for a spread of around 227bp over Treasuries, according to MarketAxess data.

HIGH YIELD

The summer doldrums appear to be in full swing with no movement among borrowers so far on Wednesday and the visible pipeline empty.

Just one issuer has tapped the market so far this week.

Hospital operator Tenet put to bed any short-term refinancing risks on Monday when it used proceeds from a three-part US$4.2bn deal to retire debt.

That could have been the last deal before activity is expected to pick up again in September.

For now markets are fretting about a possible recession after the two and 10-year US Treasury curve inverted for the first time since 2007.

And with China and Germany printing poor economic data, the market looks set for another down day.

That bodes poorly for junk credits, which have typically widened following prior inversions, though not always, JP Morgan said in a note this morning.

And default rates among junk issuers have been picking up, led largely by energy names. nL2N2591BP

Secondary levels are in the red this morning, with Tenet’s new 2026 and 2024 a touch weaker but still hovering around their reoffer prices.

Teva Pharmaceutical is a clear underperformer, with its 6.75% 2028 dropping about 1.5 points in early trading.

Teva is one of three drugmakers, that the head of the US House of Representative’s oversight panel has called upon to turn over documents as part of a review over generic drug price increases, according to Reuters.

US House Oversight Chairman Elijah Cummings and US Senator Bernie Sanders have accused Teva, along with Mylan and Heritage, of obstructing the investigation.

STRUCTURED FINANCE

Six ABS were priced on Tuesday, with just under US$3.4bn sold on Tuesday in a busy day of activity in the asset class.

More deals are continuing to emerge this week, with Neuberger Berman mandating Credit Suisse as sole bookrunner on Wednesday for a new US$355.8m non-QM RMBS deal, HOF 2019-2. The deal is expected to be priced late this week or early next week.

Bank of America Merrill Lynch and Deutsche Bank launched a US$172m timeshare ABS, EHGVT 2019-A, being issued by a joint venture between Blackstone and Hilton Grand Vacations. The ABS will finance receivables generated by the Elara Resort in Las Vegas. The senior Triple A rated A class was launched at 115bp over swaps.

Despite volatility in credit markets, securitized products have held in reasonably well so far, as the market tends to be lower beta than corporate bond markets, said Michelle Russell-Dowe, head of securitized credit at Schroders.

That means while ABS may not rally to the same extent as corporate bonds in a strong market, sell-offs tend not to be as severe, she said.

LATAM

LatAm primary markets remain quiet this week as the broader macroeconomic backdrop continues to deteriorate.

Recession worries, paired with the unfolding situation in Argentina have spooked investors and could impact a usually busy September if conditions worsen.

“It could delay some issuance in September,” said a syndicate banker.

“Nobody wants to be the first to come to market seeing these conditions,” he added.

For Argentina, the impact of Macri’s loss in the primary election continues to be felt.

The Argentine peso continues to fall and is currently standing at around 57.97, up from Tuesday’s close set at 55.5695, according to Refinitiv data.

While the sovereign’s 6.875% 2021 note is trading at a price of 55.240 this morning, down slightly from Tuesday’s close at around 57.365, according to MarketAxess data.

EQUITIES

The We Company, better known as WeWork, filed with the SEC this morning for its much-anticipated IPO, setting the stage for the company to go public as early as next month in one of the biggest listings of the year.

WeWork, which provides flexible workspaces to small businesses in 528 locations around the world, revealed it will have three classes of stock to tighten the grip of insiders and plans to list under the symbol “WE”.

The company has yet to specify a listing venue and did not outline the underwriting syndicate on the cover of the filing.

However, the filing indicates that a long list of banks led by JP Morgan, Goldman Sachs, Bank of America Merrill Lynch and Barclays will underwrite the offering.

The company, which reported a net loss of US$690m on revenue of US$1.5bn in the six months ended June 30, has registered for a US$1bn offering, though it is expected to raise more.

Meanwhile, time is running out for companies to raise money before US equity capital markets shut down for a break until after the Labor Day holiday.

Tonight will see the final two IPOs of this funding window, regional bank CrossFirst Bankshares and Chinese online consumer finance company 9F, while tonight and tomorrow night shape as the last big opportunities for issuers to bring follow-ons and converts.

Despite a fresh bout of market volatility in recent weeks, syndicate desks have brought a solid slate of offerings this week, led by a string of CB offerings in a busy period for the asset class.

Last night saw Southern Company (US$1.5bn), Akamai Technologies (US$1bn) and Workiva (US$300m) price CB offerings.

Akamai priced its eight-year CB at a 0.375% coupon, the lowest coupon ever for an eight-year, and a 30% conversion premium.

Workiva, a compliance and business reporting software provider, overcame a 7.9% slump in its share price during one day of marketing to price a six-year security at 1.125%, up 42.5%. Concurrently it priced a secondary sale of 1.3m shares at US$56.25 for gross proceeds of US$72.4m, most of which will go to current management.

Wayfair last night launched a US$750m seven-year CB that is being talked at 0.50%-1%, up 32.5%-37.5%. Goldman Sachs and Citigroup are leading the offering, which will price post-close this evening.

Bain Capital and co-sponsor GIC also sold 12.5m shares in outsourcing specialist Genpact, raising more than US$500m from a block trade via Goldman Sachs to continue their long-running monetization.