Headlines
- Indices stood firm as investors shook off geopolitical worries.
- Significant pickup in primary market activity.
Market commentary
Credit markets were strong this week, with a seemingly insatiable appetite for new issuance. Still, volatility was up at the beginning of the week as tensions between Russia and the Ukraine rose but stability eventually returned as investors managed to shake off initial woes. Eyes were also on Thursday’s ECB meeting, when a fragile eurozone recovery left the main financing rate unchanged at 25 basis points. The current low rate environment will, in our view, continue to support the market for both high yield and investment grade corporate credit as investors scramble for yield. Later today, the highly anticipated US employment data will be released, which will be an important factor for risk sentiment going forward.
Overall, the iTraxx Main (investment grade index) ended the week unchanged w/w at +70bp. The iTraxx Crossover index (high yield index) was slightly tighter by 2bp at +254bp.
With reporting season effectively coming to an end, new issue activity picked up significantly during the week, with issuers across the spectrum taking advantage of the strong investor sentiment. Overwhelming demand saw order books well oversubscribed and all transactions priced with minimal new issue premiums. In the high-yield space, we saw Finnish Metsä Board (rated B2/B+) return to the market with a five-year EUR200m offering. With an order book of EUR2bn, demand was strong and the bond initially priced at ASW+315bp and ended up trading almost 50bp tighter in the secondary market (a mere 40bp wider than ‘BB’ rated peer Stora Enso), indicating ever more compression in the high end of the credit risk spectrum. With such strong pricing, corporate bonds are becoming increasingly competitive relative to other sources of financing and we expect both investment grade and high yield issuance to remain elevated in the coming weeks. Among other noteworthy events, this week saw the first CoCo (contingent convertible) issue among the large Nordic banks as Danske Bank printed EUR750m with a coupon of 5.75%.
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