12th October 2015

Add into the bounce

MARKET CLOSE:
FTSE 100
6,416, +41
DAX
10,097, +104
S&P 500
2,015, +1.5
iTraxx Main
80bp, -3bp
iTraxx X-Over Index
327bp, -14bp
10 Yr Bund
0.61%
iBoxx Corp IG
B+159.5bp, -2.5bp 
iBoxx Corp HY Index
B+508bp, -6.5bp
10 Yr US T-Bond
2.09%

All bulled up and tighter to go… The risk asset rally is back on. Led by equities, it has drawn in credit too. We’re a fickle bunch. Few bought into the dip – add into the bounce. Torrid August and horrible September are long forgotten: good riddance. The third quarter earnings season is upon us and most corporates will likely beat lowered expectations (as is usually the case), perhaps giving reasons for stocks to push on. The Fed minutes suggest it looks increasingly likely that October won’t be the month to raise interest rates, giving stocks additional impetus. Corporate spreads will rally into the slipstream left by rising stock markets. Actually, they are doing that already. Glencore is better, VW will continue to languish, DB will raise what it needs to get its capital position in order and we all await primary to goad us back into the market. Our market has had a good week, and we suspect that it will turn out to be good month, where we gain back much more of September’s losses – and a complete recovery would not be asking too much. Fundamentals for corporate risk are intact – always have been; now we just need that improved confidence to turn into more than the odd borrower chancing its arm. Expect larger than normal IPTs, but also expect them to be ratcheted tighter once those books start to exhibit some good interest. And off we go again.

Riding the rally through the quarter… Some would have caught the bottom early last week or even the week before, others would have been frustrated at not being able to lift paper as spreads started to tighten, with dealers reluctant to let any inventory go as we bounced. Most will be delighted with the recovery. Now it’s about getting some risk on board and that will come through primary, as we do not expect secondary market liquidity to offer much assistance. Dutch utility Gasunie printed an unremarkable Eur300m no-grow floater on Friday, and the monthly IG non-financial supply levels to date sit well below the Eur2bn mark. Nevertheless, if we see the broad market confidence being sustained, new issue premiums will fall and that will entice other players out. Eur10bn or a little more for the month is a reasonable target to aim for.

No grabfest, there are no bonds… The iBoxx IG index closed Friday’s session 3bp tighter (-10bp for the week) at B+159.5bp. All sectors were better into a very strong session, with little of that aforementioned liquidity around, helping the squeeze. For instance, the higher prices in hybrids and CoCos saw the former recover almost 50% of their post-VW losses last week alone, while the AT1 market was likewise in the ascendancy and not derailed by the potential for some volatility from the Deutsche Bank situation. We think another 20bp of tightening in IG corporates is possible, which would mean all September’s widening would have been recovered. In HY, the index tightened by 6.5bp on Friday, or some 39bp in the week. We look for 30-40bp of tightening over the next 2-3 weeks and that will hit our B+475bp iBoxx IG target for the month,which we set out in previous commentary. For the synthetics, iTraxx Main was lower at 80bp (mid, -3bp) and X-Over at 327bp (-14bp).

This week sees the earnings season come to life with the likes of JPMorgan, Citigroup, Goldman, BofA, GE and Schlumberger reporting, and we have retail sales and inflation data on the macro side. Have a good week.

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.