5th April 2016

Don’t you be thinking of selling in May

MARKET CLOSE:
FTSE 100
6,165, +19
DAX
9,822, +27
S&P 500
2,066, -7
iTraxx Main
73bp, +-1bp
iTraxx X-Over Index
304bp, -1bp
10 Yr Bund
0.13%, unch
iBoxx Corp IG
B+149.5bp, -1.5bp 
iBoxx Corp HY Index
B+527bp, -2bp
10 Yr US T-Bond
1.77%, unch

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April riches…

This month promises to be an interesting one ahead of – and into – the ECB’s announcement of the details of its corporate bond purchase programme. Most will have strapped on additional/material risk positions into it. It’s the right positioning to take, and for once we can do away with the old market adage of “selling in May”. Reducing risk and trying to add back later hasn’t worked for several years, or has proved to be costly given the poor secondary market liquidity situation. With a price-insensitive ECB rocking up, there ought to be no chips being taken off the table, but we can expect investor frustrations to build as they try use up more of their cash positions. There’s not going to be enough paper to go round, unless primary’s burst into action is sustained. And there’s no point sitting on cash, as it returns nothing.

Today’s fill of bonds came in the form of a 4-tranche deal from FedEx (€2.75bn) and €750m for finance group Leaseplan. Covered bond issuance came from Lloyds, while Credit Suisse printed a two-part senior transaction totalling €2.75bn. fedexAfter Akzo’s deal into the non-farms last week, the market is in good shape and transactions ought to be well-received. Even the macro data was helpful, with eurozone unemployment falling and a confidence survey suggesting an improvement in tone. We will stick our necks out and look for IG spreads, as measured by the Markit iBoxx corporate index, to be close on B+140bp (currently B+151bp) by the end of the month – and if we are right, the HY index ought to be through the 500bp level (currently at B+529bp). That is, the ECB’s attempts to engineer an environment where risk assets return little or nothing will succeed and result in some sustained moves tighter for corporate bond spreads.

Certainly for borrowers

We know there is very high demand for almost anything primary. So why do banks go out with “wide” IPTs only to see them tighten up by 10-20bp into final pricing? FedEx’s transaction yesterday saw all tranches 15-20bp tighter, and we had the same situation for Akzo’s deal last week and with just about every deal we care to bring up going back many years. Surely it’s not best market practice, nor have the bankers completely misread the market – yet again! Investors will “never learn” because they don’t want to miss out – it’s like the riches are too tempting to make a principled stand. Issuers will always revel in the bravado of not having been seen to have paid up. Syndicate desks (banks) take no risks, price it wide, get the books built up, tighten the pricing (annoying investors) and are thanked by their “client” for the wonderful execution – for an appropriate fee, of course.

Is the investor the loser, the issuer “the game” and the syndicate desk the winner for almost always executing a risk-free transaction – for them? In their defence, the syndicates would probably argue that fees are pared down to the bare minimum and do not justify anything less than risk-free execution. Anyway, as for what to expect this month in terms of non-financial IG corporate issuance, April has tended to be an unpredictable month. Since the crisis began, it has seen between €5bn and €26bn of supply, according to Dealogic data, with last year at the upper end of that limit. As seen from the chart below, the quarter as a whole will likely result in some substantial issuance and given the €4.25bn seen so far as well as the known pipeline, €60bn or more through to the end of June looks quite possible.

The record issuance in 2009 was on the back of global crisis needs, while since then we seem to have had a steady increase following the 2010’s downturn as the market has opened up, matured and corporate funding has disintermediated away from traditional forms (banks).

2nd quarter IG non-financial bond issuance

Symbolic for credit, more to come

The markets got off to a so-so start for the week. European equities closed off their session highs but ended in the black and around 0.3% higher. Oil was off a percentage point or so with prices wrapped around $38 per barrel. Government bond yields started the session moving lower with some excitement around potential for ECB buying as they increase the asset purchase programme from €60bn to €80bn per month from now, but that faded and yields ended the session close to unchanged. In the corporate bond market, the focus was on primary and that FedEx deal.

So, in secondary, spreads edged better with the Markit iBoxx index spread lower at B+149.5bp – the first time it has dropped through the 150bp level this year. The yield on the index dropped 3bp to 1.34%. Similarly, the high yield index moved a touch better while the index yield fell to 5%. And yes, there is still much value in European high yield.

Have a good day.

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.