7th April 2016

A Thursday in April

FTSE 100
6,162, +70
9,265, +61
S&P 500
2,067, +-22
iTraxx Main
77bp, unch
iTraxx X-Over Index
317bp, unch
10 Yr Bund
0.12%, +2bp
iBoxx Corp IG
B+148bp, -0.75bp 
iBoxx Corp HY Index
B+528bp, -1bp
10 Yr US T-Bond
1.75%, +3.5bp

Warm glow, but no one wants zombification…

The big theme gripping the corporate bonds – the ECB – has left a very technical market where finally, on a significant down day for risk assets like Tuesday, we managed to hold firm. In the face of that intra-day adversity, even higher beta risk – the riskiest of debt – managed to edge only a tad wider as traders chose to mark valuations a little defensively because it’s “the thing to do” – or, as human nature has it, just in case. The reality of course is something different. The flow/selling into it was very light.

From now and until the corporate bond purchase programme, we think unless major event risk sees the stock market tumble over, say, 3% per session – or for a few sessions, amid some sort of fear and panic – then credit spreads are technically going to remain well-supported. no-zombies-pleaseFor sure, on any significant risk-off induced downside, corporate bonds spreads will weaken, but the sector will outperform. The good side of this is that capital is preserved and returns are sustained, leaving an assuredness around our market. The bad is that the corporate bond market is no longer “tradeable”. Sell corporate A for a few basis points and switch into slightly lower-rated corporate B; or sell corporate A into longer-dated corporate B for a pick-up? It can be done, but for a while now it’s hardly been worthwhile doing this kind of trade. We’re simply long, directional, loaded up and hoping. Single-name event risk and finding enough bonds – and bonds with perceived value – are our problem.

Looking for a catalyst

Opening with stocks in Asia fairly directionless even after some better than expected manufacturing and services surveys for March from China, we failed to push higher in Europe. We endured a very subdued session. It says a lot when we can get half-excited at better than first- published industrial production numbers for February from Germany that were revised higher from -2.3% to -0.5%! It wasn’t as bad as first feared. German Bund yields ended a touch higher, with the benchmark bellwether 10-year yield now at 11bp, while peripheral yields also backed up a basis point or so. BTPs were at 1.29% and Bonos at 1.51%. The euro was at around $1.1350 and oil prices firmed, with Brent closing in on $39 per barrel again as US crude oil inventories registered a fall. Equities played out in that “no man’s land” area – some were up a little, others were down a little – before a late surge helped lift most 0.7% on average higher. The story was elsewhere though – and that was with more supply in the bond markets.

April IG non-financial corp issuance

April shaping up to be a biggie

More issuance kept the corporate market happy as we were greeted with a plethora of deals. Mostly covered and SSAs, but others too to keep investors occupied. This time Telefonica took a combined €2.75bn in 6 and 10-year maturities, with both tranches priced 15bp inside IPTs on books of €7bn. telefonicaLagardere followed up with a €500m, 7-year transaction at midswaps+260bp – or 20bp inside that initial price talk. That’s a wide print, but the borrower is unrated and probably makes it into investment grade on an implied rating. The total issuance now for the month – which is just four sessions old – stands at an impressive €11.35bn.

It is going to be a record April for non-financial IG supply (see chart above). The other deal of note was the T2 issue from ING in a 12NC7 format, issued from the operating company but with the option to be loss-absorbing and transferred to the holding company if need be. Another sign that until the TLAC rules are set in stone, structurers will try and front-run the potential rules. Why hurry?

In secondary, we saw the corporate bond market slightly better bid for choice and that was reflected in the indices, with the Markit iBoxx IG index a little better at B+148bp (-0.75bp) and the HY index effectively unchanged at B+528bp. The synthetic indices closed unchanged. The Fed’s more cautious tone in the minutes published overnight – reducing the likelihood of an immediate rate hike – saw to it that stocks got a boost, and the S&P was up 1% into the close.

Back in the morning, as usual.

Suki Mann

A 25-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 Credit Market Daily.