Suki Mann

Author Archives: Suki Mann

19th February 2016

You can always get what you want

MARKET CLOSE:
FTSE 100
5,972, -58
DAX
9,464, +86
S&P 500
1,918, -9
iTraxx Main
111bp, +3bp
iTraxx X-Over Index
442bp, +8bp
10 Yr Bund
0.22%, -5bp
iBoxx Corp IG
B+186bp, -2bp 
iBoxx Corp HY Index
B+640bp, -10bp
10 Yr US T-Bond
1.74%, -8bp

If it feels like it, it must be… It feels like it has been a good week. Stocks plumbed the depths, but have rallied by 1-3% almost every day and oil prices have moved higher – double-digit percentage points on one occasion. The DAX has put on around 700 points from last Friday’s lows, for example, while oil per barrel is worth $30-34 depending on the measure (WTI/Brent). These have been the headline grabbers. We wouldn’t say it has necessarily been full “risk-on” given that eurozone government bonds have stayed stable, although we concede that US Treasuries have faltered (yields popped higher). In the eurozone, we still have to contend with the likelihood of additional QE come March. For corporate bonds, the now high-beta corporate bond markets bellwether – the 6% Deutsche CoCo – has bounced 11 points ($81 cash price), which is actually a decent recovery; the Markit iBoxx HY index (broad measure for that market) has tightened by 20bp, but the IG index has trudged lower by just 4bp in the week. The iTraxx indices have returned from the brink too, but that should come as no surprise given how stocks have performed. However, the Fed’s January meeting minutes warned of downside risks to US growth, while just 3 months after publishing their 2016 outlook, the OECD was slashing its growth expectations for the year. Global growth is now expected to be around 3.0% (-0.3% versus previous estimates) and the eurozone at 1.4% (-0.4%), with Italy and Germany seeing the biggest revisions of -0.5% and -0.4% respectively. The US drops to 2.0% (from 2.5%). Of course, the organisation can – and usually does – get it wrong, but the big picture is clear: expect lower growth and for macro to disappoint, more QE, lower central bank rates forever and more (and deeper) negative deposit rates. That means low yields and returns, corporate cost-cutting, pressure on corporate earnings, weaker investment/capex levels and increased potential for greater event risk. We’re caught in a trap: Rearrange “It’s a, vicious, fight, and, on, hands, our, a, have, circle, we” – and one gets the picture.

ECB ready for action… And we’re all cock-a-hoop. Never mind the pros and cons – mainly cons – the market wants lower deposit rates and more bond buying. The market will get what it wants. The release of the ECB minutes served to confirm the central bank’s appetite for further action, and this was reflected in the rally in peripheral yields. Only a week ago, it was all hands to the pump in the flight-to-quality trade – and never mind potential ECB action – but now it’s a case of pile ’em high ’cause they’re cheap; the ECB shopping trolley is about to do the rounds. At over 4% last week, the yield on the Portuguese 10-year dropped by almost 25bp at one stage on Thursday only to end just 7bp lower to yield 3.37%, while BTPs (1.55%) and Bonos (1.69%) were 3-5bp lower in yield. Nothing has fundamentally changed to suggest Portuguese yields should be almost 80bp lower in the week. How fickle we are sometimes. Bund yields also declined with the 10-year at 0.22% (-5bp) while oil prices were choppy and finally down slightly on the day into the close.

Primary boosted by drugs groups… Pharmaceuticals dominated the new issue market as we finally had some non-financial supply following a 2-day lull. The deals came in the form of a dual-trancher from of rare offerings from Amgen and Roche. The former took €2bn in 6-year and 10-year funding, with both tranches around 15bp tighter than the initial price talk. Roche’s €650m in 7-year funding took total YTD non-financial issuance to just over €19bn. Anglo American announced a $1.3bn buyback of short-dated debt as part of its ongoing debt management/asset disposal/getting back to health operations. The senior bank deals launched this week are all performing, and up to 8bp tighter versus reoffer (BNP). In secondary, there are signs that some profit-takers are emerging in the Glencore’s of the world and some of the CoCos, but generally the picture remain the same – it’s considerably more difficult to buy the (still) beaten up names. The Markit iBoxx index for IG corporates closed a couple of basis points better at B+186bp, while despite evidence of profit taking, the CoCo index yield fell to 7.78% (-32bp, -198bp off the highs of last week!). Elephant trade? In HY, the index was 10bp lower at B+640bp, reflecting the better tone in risk markets overall. Flows remain subdued. The iTraxx indices gave up earlier gains to close wider versus the previous closes, with Main up at 111bp and X-Over at 442bp. It wasn’t too long ago that we talked about 100bp/400bp for Main/X-Over…

That’s it from me this week, have good day and weekend. Back Monday.

18th February 2016

One way or t’other

MARKET CLOSE:
FTSE 100
6,030, +168
DAX
9,377, +242
S&P 500
1,926, +31
iTraxx Main
108bp, -6bp
iTraxx X-Over Index
434bp, -21bp
10 Yr Bund
0.27%, +1bp
iBoxx Corp IG
B+188bp, -1.7bp 
iBoxx Corp HY Index
B+650bp, -7bp
10 Yr US T-Bond
1.83%, +6bp

Stock-taking time… It’s not often that we can say that there wasn’t too much going on. Midweek in the middle of February, and time to take a breather. It’s been a whirlwind of an opening seven weeks to 2016, but unfortunately there’s been no romance in it. The markets have got themselves in a bit of a pickle. We’ve fretted about the price of oil, the weakening incoming economic data, poor liquidity everywhere and US rates, while quite strangely, a poor earnings season has seen corporates punished initially (stock price) only for a decent bounce to follow. The tea leaves tell us it is going to be a difficult macro scene for the rest of 2016. The ECB will ease while the Fed will delay. China will slow but will ‘kitchen sink’ it on the policy front to try and prevent a hard landing. US growth isn’t going to save the world, while the eurozone is still all about ‘fits and starts’. A 1-2% move up or down in stocks is now the norm and barely raises much concern and new record low yields in some government bond markets are an expectation, while we ponder as to why corporate bond markets in Europe are feeling as heavy as they are. Real money investors take some comfort with flat returns year-to-date, while benchmarked investors try to scramble for a more defensive positioning bias (lower beta). We all want to chase yield, but the commodity and CoCo debacles have been an annoyance and a frustration. And a reality check. We still believe that there is tremendous strength in the European corporate bond market and we should sometimes, perhaps, look at its being untradeable (poor liquidity) as a positive. Instead, when equities are dropping like stones and there is a rush for safety, the lack of a Street bid (not the Street’s fault) is seen as a sign of an immature market or one which is in precipitous decline, tarnished with the same ills as the stock market. Corporate bonds have always been meant to be buy-and-hold investments, while much of the current illiquidity is down to huge demand and not enough supply (regulatory impact on trading books aside). The huge growth in the market (from €700m in 2007 to €2trn) came about because investors were chasing yield (in 2009) initially and a clipped a quick turn as spreads and yields collapsed. Corporates disintermediated their funding into it. For investors, it is now about preserving capital and generating income.

Just another day at the office… Anglo American was junked by Fitch, but only to BB+/negative (Moody’s was Ba3/negative) while S&P cut Saudia Arabia’s rating to A- and Bahrain’s to BB (both two notches) as the oil/commodity-related fallout continued. Adding to the gloom, Greece was back in deflation territory and RWE suspended its dividend, while Schneider softened the blow of warning on 2016 with an increase to its share buyback programme. On the bright side, US producer price inflation perked up and so did January manufacturing activity. Oil prices fell then were higher, equities were just higher, while the iTraxx indices were were significantly lower and cash credit did very little. Even the highest beta of battered credit, Deutsche’s 6% CoCo, failed to elicit a decent move higher in price given the rally in stocks, stuck at around $80 cash price. Primary drew a blank from non-financials, which was a surprise. As we suggested previously, the demand is there – as witnessed by Apple’s mammoth $12bn offerings and Honeywell’s €4bn issues, and they were all this week. We did get €2.5bn of senior bank issuance (Santander, Nordea and SEB) to add to the €6.5bn printed this week already. The rest was covereds and SSAs.

Better, but still a labored recovery in cash credit… Corporate bond spreads are not racing back like equities might be, but we’re tightening. The Markit iBoxx IG index closed at B+188bp (-1.7bp, still +34bp YTD) with paper marked better across all sectors amid low flows (again). CoCos were again better, reflected in the index yield dropping to 8.1% from 8.55% in the previous session, and off the 9.7% yield high a week ago. In HY, the index was a little tighter at B+650bp (-7bp). The synthetic indices finally crunched better though, with iTraxx Main down at 108bp and X-Over at 434bp, some 6bp and 21bp tighter respectively. The DAX closed up a commendable 2.65% but government bonds didn’t really sell-off with yields barely higher – peripheral yields actually declined. The 10-year US Treasury yield was up at 1.83% and that compares with 1.54% a week ago. Oil prices were up by 5.5% on average and the S&P closed up 1.65%.

It’s all upbeat, happy Thursday. Have a good day.

17th February 2016

Don’t back up the truck just yet

MARKET CLOSE:
FTSE 100
5,862, +38
DAX
9,135, -72
S&P 500
1,896, +31
iTraxx Main
114bp, -1bp
iTraxx X-Over Index
455bp, +5bp
10 Yr Bund
0.26%, +3bp
iBoxx Corp IG
B+187.5bp, -2bp 
iBoxx Corp HY Index
B+657bp, -5bp
10 Yr US T-Bond
1.78%, +3bp

Feed the fish when they are biting… It is so tempting to think about backing up the truck. After all, entry levels are so much better than they were. Credit spreads have widened 25% in both IG and HY, and there is paper around in secondary with willing sellers into a sensible bid. And while stocks were down today, they have bounced back (generally), while oil has been on the rise and seemingly found a floor at $30+ per barrel. Inflation forwards might start to look better into this, while we are all fairly sure that additional ECB stimulus is coming. We can almost totally dismiss the weak German ZEW business sentiment reading taken at the peak of the recent weakness – of course, in the eye of the storm, sentiment would have soured. With all that though, we don’t see much willingness from investors to pile in, save for a few believing that bank subordinated paper – especially CoCos – have been way oversold. The probably have, but unfortunately the next headline isn’t far away. We are however very surprised that the primary market for new non-financial corporate deals delivered nothing. After Monday’s Honeywell grabfest, we would have expected issuers to have taken note and chanced their arm. The demand for primary corporate risk is very strong; there’s comfort that new issue premiums will generate some performance and deals will get away. Spreads in cash have stabilised for the moment, and we are resigned in our belief that they will not ratchet better any time soon. They are likely to tighten only very modestly on a good day, while they will quite possibly gap wider on a down day. So now is not the time for borrowers to penny-pinch if there is a pressing funding need (or otherwise). We believe the pipeline is decent, although visibility is mainly around the US borrowers which have been roadshowing their wares (Amgen and LyondellBasell, with ASML also due).

Oil producers snatch defeat from jaws of victory… A potential freezing of output at current levels by four of the big oil-producing nations was initially greeted with much enthusiasm, with prices rising by 5-6%. However, on closer inspection the markets decided the deal might be too good to be true, and down we went! As well as other nations also needing to agree, demand declining and the US shale gang looking on with potential opportunity to up the rig count, that early brightness was dimmed. Other news took in more weakness in US manufacturing, this time from the NY Empire survey, oil-dependent Norway’s GDP fell by 1.2% in Q4 and UK inflation rose a little in January. Oil ended the day a  lower (1.5-3% between WTI and Brent) and European equities were mixed between +/-0.5% for much of the session, but gave way to weakness into the close (DAX -0.75%). Government bond yields didn’t move much, a little higher with the 10-year Bund at 0.26% (+3bp), the equivalent BTP at 1.63% (+2bp) and the Bono at 1.74% (+5bp). Portuguese 10-year sovereign yields were just a basis point higher at 3.50%.

Credit’s so-so day… Not in terms of credit quality, given the 3-notch hammering dished out to Anglo American on Monday by Moody’s (to Ba3/negative). But a tentative bid has re-emerged, although flows and volumes remain light. And higher beta paper was the outperformer, despite a more mixed stock market. The Honeywell deal came with a 10bp premium and tightened by pretty much that amount. Elsewhere, CoCos notably continued to edge higher amid the lightest of flows, but such is the level of secondary market illiquidity that the price action is quite disproportionate. Anglo paper was down and out at one stage but managed a decent recovery to close around a point lower, probably helped by news of its previous restructuring plan adding another $3-4bn of asset disposals. Having seen $69 at the beginning of last week, Deutsche’s 6% AT1 was up at $80, while the bank’s CDS was down at 220bp (recent high of 280bp) – so a decent recovery into the generally improved sentiment in the markets. In primary, we had several rather unspectacular senior financial deals (Santander, BNP and SG) to contend with. Overall, the Markit iBoxx IG index was 2bp tighter at B+187.5bp, CoCo index yields fell another 50bp and the HY index was down at B+657bp (-5bp). That’s only 11bp off the wides we saw a few days ago, highlighting the very laboured recovery in cash valuations. Finally, iTraxx Main closed at 114bp and off the earlier session low of 110bp, while X-Over was at 455bp – also well off an intra-day low of 438bp.

The US closed out up around 1.7% (S&P), so we look for a better start. Have a good day.

16th February 2016

We can work it out

MARKET CLOSE:
FTSE 100
5,824, +117
DAX
9,207, +239
S&P 500
1,865, closed
iTraxx Main
115bp, -3bp
iTraxx X-Over Index
450bp, -14bp
10 Yr Bund
0.24%, -2bp
iBoxx Corp IG
B+189bp, -1bp 
iBoxx Corp HY Index
B+662bp, -6bp
10 Yr US T-Bond
1.75%, closed

It’s all good, again… Two days of stellar gains and the crisis is over. In a flash. 2%+ gains on Friday and 3%+ on some equity bourses on Monday, and we can forget that China came up with yet another poor export/import performance in January and that Japanese industrial production slumped dramatically in the same month. The headwinds to a glorious economic recovery remain the same, but the mood in equity markets has flipped. We’re not sure why. Maybe the market was oversold – we know macro is bad and will stay that way, but more importantly we are not going to fall off a cliff. A Goldilocks-type economic trajectory, where we probably blow a little on the cooler side, which would leave the central banks keeping it all chugging along through, say, 2016. That would be good for the corporate bond market. Higher beta risk should outperform. But the addition of riskier paper will be dependent on how equities react. If they have found their floor and can stay at around these levels or better then we might start to get some incremental recovery in corporate bonds, and that would include higher beta risk all the way down to the CoCo bond market – eventually. We have some important inflation data points being released this week, and if they continue to show a disinflationary/deflationary trend (which they will), then the market will get more comfortable with the potential for no imminent rate hike in the US but for further easing from the ECB. That would leave equities with some fuel to fire up some more, and that improved sentiment will not be lost on credit markets. It wasn’t in Monday’s session, with the primary markets open and US borrowers not shy in stepping forward despite the domestic holiday. Our view: we stay a little circumspect; the aforementioned upbeat possibilities are too clean, too precise and too good to work out with such a clear trajectory. There are opportunities, though, and there will be more soon enough. Still, it was a very strong day. Equities led the way, but we faded the initial big bounces in iTraxx synthetic markets. Cash in secondary saw subdued activity, but some oversold situations did manage a decent recovery (Deutsche’s 6% CoCo +3 points). The focus was on primary

Primary only place to chase a NIP. Why buy illiquid secondary?… There’s nothing dulling appetite for corporate bonds. Investors may be shying away from lifting much in the secondary market, but they’re piling into primary. The herd mentality never left us. So much so that borrowers – and US ones at that – are happily taking our cash/funding. Such was the demand that initially cheap price guidance was being ratcheted tighter. With little by way of material outflows, and corporate bond returns around 0% YTD (equities double-digit losses YTD), there is confidence around adding risk – through primary. And that includes for US corporates, which were shunned through the whole of January where last year’s preponderance of deals had seen some aggressive negative price action. Well, they’re back, and we’ve forgiven, and/or forgotten. High triple-B rated Carnival Corp took €500m in a 5-year transaction at midswaps+160bp (-5bp versus IPT), while Honeywell plundered €4bn in a 4-tranche transaction out to 12-year maturities (on word that books were around a fantastic €20bn). Depending on the tranche, pricing was tightened by up to 15bp. That’s almost €16.5bn issued in IG non-financials YTD. In senior financials, Nordea took €2bn and ING €1.25bn in a fairly busy start to the week.

Draghi talks tough, euro weakens… In musings to a European parliamentary committee, Draghi managed to wield some magic yet again and bring the euro down to $1.11. He defended QE/negative rates and the impact they have had on growth but acknowledged the failure to boost inflation. With the ECB “ready to do its part”, he have a push to government bonds, with the 2-year Bund yield down at -0.53%, the 5-year to -0.31% and the 10-year closed out lower at 0.24%. Italian, Spanish and Portuguese bonds got a bid too, the latter some 21bp lower at 3.48% (10-year). All good stuff from Draghi overall, and little otherwise to ruffle feathers. We closed out with the DAX up 240 points (2.7%) and the CAC some 3% higher. Oil barely moved, but after 10% plus gains at the end of last week, that was to be expected. For the cash market, the Markit iBoxx IG corporate index managed to tighten by just a basis point, to B+189bp, illustrating the lacklustre effort in the secondary market. The recovery in bank subordinated debt was the highlight of the day and left the CoCo index yield down at around 10.5% (-60bp). After the close, Anglo American’s rating was cut to Ba3 from Baa3 (three notches) in a fairly ruthless move by Moody’s – the outlook was left at negative. In HY, we had just 6bp of recovery which goes to show how suspicious credit market participants are – or, the lack of interest to get involved. The synthetic indices were left with Main at 115bp and X-Over at 450bp, having faded earlier lower levels. For example, X-Over was down at 436bp during a quite euphoric open.

Back tomorrow, have a good day.

15th February 2016

Japanification of the € corporate bond markets, what happened?

MARKET CLOSE:
FTSE 100
5,708, +171
DAX
8,068, +215
S&P 500
1,865, +36
iTraxx Main
118bp, -8bp
iTraxx X-Over Index
464bp, -22bp
10 Yr Bund
0.26%, +7bp
iBoxx Corp IG
B+191.7bp, -0.8bp 
iBoxx Corp HY Index
B+668bp, +6bp
10 Yr US T-Bond
1.74%, +9bp

I wouldn’t be buying the dip just yet… After some of the moves we’ve seen these past few weeks, capitulation has become very topical. Capitulation in any asset class is a disorderly exit. Cash becomes king. Capitulation is mass panic, and in the corporate bond markets that means issuer credit curves ultimately invert (or bear flatten, see chart). Investors sell the “highest” priced assets regardless of spread, leaving short-dated, quality assets as the big underperformers. We’ve not even witnessed a hint of that – even in the CoCo bond market, credit curves are generally still upward sloping. For this to change, we believe a systemic financial crisis is needed, and at times it appears that we are willing for this to occur. The last time we saw curve inversion across the corporate bond market was in the 2008-2009 period when the “original” financial crash sowed the seeds for the current crisis. The front end took a battering as investors sold whatever they could (the best prices were for short-dated quality corporate bonds) in order to meet the torrent of fund outflows, as money made a dash for safety and quality. Lehman’s collapse meant that the potential for a systemic crisis was real (the rest is history). This time round, we don’t foresee a systemic crisis as yet. The central banks still have some ammunition left, and it would seem to us that right now we are adjusting valuations to more sensible levels as we come off the artificial QE-inspired bubble. QE, that is, is becoming less effective, but we could have further to go in terms of downside risk in this sense. Central banks have been dumbing it all down for several years, while politicians have failed to act. That means low rates “forever”, low yields forever (haven’t we heard that before?) and a need to get over this “correction”. Then we can look for macro to stabilise at lower growth levels and for an extended period, leaving corporate bonds to regain their lustre. Maybe that’s being too optimistic.

Double-A credit curve flattens as 2008 crisis rages

Rally justified, or just misleading into long weekend?… The equity markets rallied with gusto into the close of last week, but we think it was about closing out any (short) positions ahead of the long weekend (US closed today for Presidents Day). The eye-catching market news was around Deutsche Bank’s tender offer for €3bn of senior bonds. The tender, in our view, was not particularly aggressive and seems to have been more about intent and anchoring prices than actually buying bonds. For DB’s US$ bonds, it was essentially targeted at the long end, and we note that the 3.125% 21 and the 4.1% 2026 issues were only issued this year, at spreads T+157bp and T+200bp respectively (tender offer at +270bp and +322bp). Ouch. They couldn’t tender for any distressed AT1 risk without regulatory approval – which they probably wouldn’t get – while an operation to tender subordinated debt would take too long anyway. Overall, the market didn’t seem too excited, with sentiment seeing only a moderate rise in the 6% CoCo, for example, to around €74 cash price (noise, in other words). Eurozone GDP and industrial production in Q4 played out in line with forecasts (still very dire at 0.3% for both), while separately, Spain headed deeper into deflation territory in January. US retail sales in January surprised to the upside, while consumer sentiment as measured by the Michigan survey showed a dip in early February. The previous overnight falls in Asia were seen as being about playing catch-up, having absolutely no impact on Europe’s open and leaving equities to rally hard in the week’s final session. Oil prices rose by a huge 12%, leaving WTI up at $29 and Brent at $33 per barrel. Trading? It’s a mug’s game.

So what next?… Our view is that the central banks will stand up and be counted should the potential for a systemic crisis appear (even more QE – but less effective, ineffective rate cuts and so on). The markets will get temporary highs off any actions. We do, nevertheless, discount the possibility of a crisis of systemic proportions in 2016. If we can manage some calm, that could eventually lead to a resumption in credit spread tightening and a compression of sorts between high and low beta credit credit in IG, in the first instance. That’s because low yields and a low default rate into a not too hot/cold economy should encourage money back into higher beta credit. That would leave us with something akin to what we witnessed as a trend in the 2011-2014 period, although less aggressive. Back then, the interest in corporate bonds intensified to such a great level that we were looking at the “Japanification” of the corporate bond market (massive compression). That prospect is all but lost given the quite dramatic unwind in spreads since early 2015. It is difficult to see that previous level of compression returning. For now, stay cautious and add if conviction is resolute. Few are willing to step up in isolation, but they will be adding when everyone else does (safety in numbers), which unfortunately will mean risking disappointment on the crowding-out effect.

CoCos: A spectacular fall from grace

Credit markets need much more convincing… The iTraxx indices were the outperformers at the end of last week, likely as (profitable) short positions put on during the previous protection lifts were closed out. The cash market was much more circumspect, while many had an eye on the new issues of the day. In synthetics, Main and X-Over dropped by 8bp and 22bp respectively, to close at 118bp and 464bp. And that is from levels which were at multi-year highs in the prior session. In cash, the Markit iBoxx IG corporate index was barely tighter, while the HY sector saw more weakness as the index edged up to B+668bp/index yield at 6.43%. The last time we saw these kinds of index spreads/yields was back in early 2013. CoCos have been under heavy attack and have experienced a quite spectacular fall from grace in the space of a few weeks. The chart above shows how the yield on the Markit iBoxx CoCo index has risen by 60%, from a little under 6% at the beginning of the year to 9.6% now. On the issuance front, we had Klepierre print a 10-year maturity for €500m at midswaps+130bp. The €1.75bn book allowed the initial guidance to be lowered, but the deal still offered a 10bp new issue premium and was trading up on the break. United Technologies became the latest US borrower to visit, with a 3-tranche €2.2bn transaction, and the day’s two borrowers took us through the €10n issuance barrier for IG non-financial issuance this year, to just under €12bn.

Have a good week. Back tomorrow.

12th February 2016

The St. Valentine’s Day Massacre

MARKET CLOSE:
FTSE 100
5,537, -136
DAX
8,753, -264
S&P 500
1,829, -23
iTraxx Main
126bp, +9bp
iTraxx X-Over Index
486bp, +31bp
10 Yr Bund
0.18%, -5bp
iBoxx Corp IG
B+192.5bp, +5bp 
iBoxx Corp HY Index
B+662bp, +19bp
10 Yr US T-Bond
1.64%, -3bp

Still we don’t throw in the towel… We haven’t capitulated yet, but we are working on it! X-Over heading to 500bp isn’t good, but it isn’t capitulation. Equities falling 2% a day with odd days of respite – over a period of weeks – is unwelcome, but it also isn’t capitulation. Credit spreads going higher isn’t capitulation either. If there’s order in the weakness, it isn’t capitulation – more perhaps a sustained bout of panic. Everywhere one looked, the news was bad. Poor earnings reports saw an unforgiving market hammer individual names as the likes of Tate&Lyle and Societe Generale took a pummelling. Bund yields up to intermediate maturities hit record lows while the 10-year at 0.16% was 11bp off its record low from a year ago (0.05%, closed at 0.18%). And that’s before we consider further QE from the ECB. Panic, a calculated move to put its currency under pressure or just ahead of the curve in a beggar-thy-neighbour cut, the Swedish Riksbank slashed its deposit rate to -0.5% from -0.35%. Treasury yields in 10-years dropped to 1.55% (-12bp) at one point and the equivalent Gilt yield fell to a record low of 1.27% (closed 1.28%). That’s all relatively good news for performance for fixed income total return investors (see chart). IG corporate bond returns are still amazingly in the black YTD (+0.05%), even though spreads have gapped 40bp in the last 6 weeks (see chart). Obviously the rally in that underlying is responsible for total return money investors’ bounty in corporate bond markets, and this positive figure also goes someway to explain the lack of significant outflows from the asset class. There’s little alternative in terms of income generating assets, and while that’s never a good reason to promote an asset class, the current ills elsewhere should help to promote the defensive nature of solid, plain vanilla corporate bonds. Usually, if credit funds experience outflows the money goes to government bonds for safety or equities for better future upside (cycle has turned). The former offers nothing given the negative/very low yields, while the latter likely offers huge volatility and capital losses and extreme uncertainty. With this unusual, disjointed macro-economic and strained systemic structure we currently face, IG corporate bond investments promise to preserve capital and generate some income. That is, the best of both worlds – or the best of a bad bunch.

Fixed Income: The Ultimate Defence

Fixed Income Ultimate Defence

 

If it looks bad, it’s because it is… Deutsche Bank’s CDS rose to 280bp (+35bp, closed 270bp) and is materially higher than levels seen in 2008 (175bp), while still short of the record high 320bp seen as the Greek crisis peaked back in 2011. The 6% coupon CoCo fell to below 70c (-6 points) on the dollar and Wednesday’s bounce in the bank’s stock, CDS and bonds was over in a flash. The DAX fell below 8,700 briefly, before managing to stage a recovery and ended only 2.9% lower at 8,753 (-264) while French stocks, as seen through the CAC index, fell 4% with losses accelerating into the close. Oil prices fell with WTI at $26.1 per barrel and Brent holding $30 per barrel – just (it will soon give way too and converge on the WTI price). Main rose to 126bp and X-Over to 488bp at the session wides. Cash was marked wider again as any bid was there solely to miss. The chief beneficiary was perceived quality – government bonds and gold prices rose. 10-year Treasuries ended the session offering a 1.64% yield (2-year UST+99bp). In Europe, the 2-year Bund was at a record low yield of -0.55% and yields were negative all the way out to 8-years. Peripherals gapped with the Portuguese 10-year up at 4.06% (+38bp), Italy at 1.71% (+8bp) and Spain at 1.77% (+6bp). We can’t help thinking that there is more downside to come and we’re not just hostage to any immediate headline anymore. There’s a battering ram of poorer macro to come as the opening two-months of weakness in markets feeds into the real economy. February’s data, albeit backward looking when published, will only serve to quite possibly presage more weakness through March.

Credit markets beaten too, but putting up a fight… The markets generally tried to rally mid-session, but gave up the battle into the close. The DAX/€ Stoxx 50 are now down a massive 18.5% YTD. The FTSE and S&P have also been clobbered. IG euro/sterling corporate bond returns in investment grade are flat YTD. While junk bonds get a bad press, they are “only” down 3.3% YTD and the low default rate in Europe means they are still paying coupons pretty much everywhere. The bad press around them is unwarranted, but we can understand they supposedly make a good headline. Remember, many HY entities managed to get much finding in during their good years (2011-2015) and the refinancing wall has been pushed out to 2018. Unless the Eurozone economy literally falls off a cliff, they’re going to be money good. The only asset classes beating corporate bonds are precious metals and government bonds. The IG Markit iBoxx corporate bond index closed at B+192.5bp, almost 40bp wider YTD and some 5bp wider in the session. Yuk. In HY, it was worse with a B+662bp iBoxx index level into the close (+19bp, almost +140bp YTD) as illiquidity, low flows and fear all weighed on the sector.

What next? Wait until Monday. Have a good day and weekend. Back soon.

11th February 2016

Boing, boing, boing

MARKET CLOSE:
FTSE 100
5,672, +40
DAX
9,017, +138
S&P 500
1,852, unch
iTraxx Main
117bp, -5bp
iTraxx X-Over Index
455bp, +7bp
10 Yr Bund
0.24%
iBoxx Corp IG
B+187bp, -0.5bp 
iBoxx Corp HY Index
B+644bp, -1bp
10 Yr US T-Bond
1.67%

Tentative recovery, deep suspicions remain… Who wasn’t tempted to think we’d turned a corner? Such is human nature: we’re either cock-a-hoop or morose. And with stocks offering an upbeat session despite overnight weakness in Asia – although once again we believe they were playing catch-up rather than leading – the temptation must have been to get some risk on board at these “distressed-like” valuations. We say “temptation”, because few really traded into it. Prices were marked better, as we would expect, but with little conviction behind them. After all, the newsflow once again left much to be desired. AP Moller, Hermes and Akzo-Nobel – all “crystal-ball” companies – warned on 2016 profits, the UK suffered its worst monthly contraction in industrial production in several years (France and Italy also saw poor numbers for December), while BP warned on downside risks to oil prices in the next six months. Given that we swatted all that aside, it leads us to believe that the session was more than likely a dead-cat-bounce in valuations that had been pummelled for too many sessions than we can care to remember. If we are right, then the next stage might well take in some calmer climes before we resume some sort of slide lower. After all, the newsflow is unlikely to perk up any time soon. We also concede that there is no obvious developing situation pushing markets to the brink of a capitulation event. There are many fears around what is now the obvious – China, US rates, global growth, oil prices and the effectiveness of monetary policy – and they are all keeping the investor/public mood circumspect. The problem is, we’re seemingly always a headline away from a 5% drop in oil prices, a 2-3% fall in equities and, say, iTraxx Main/X-Over gapping 5-6bp/15-20bp. That’s hardly a recipe for making a considered investment decision. So don’t.

Banks bounce, equities up, let the good times roll… Well, not so fast. After the pummelling taken by bank stocks in particular, there was always going to be a feeding frenzy of short covering – and, dare we suggest, some bottom fishers. Deutsche Bank led the way, the market warmed no doubt by the possibility of bond buybacks. CoCos got a leg-up from the speculation, while its stock price rose double-digit figures. Interestingly, the better tone failed to bring out any new non-financial corporate borrowers, although a calm day today and we would expect a few of them to chance their arms. In our view, Yellen said all the right things in her testimony on Wednesday, aware of the impact on domestic growth and global turbulence of any misjudgement regarding the pace of tighter financial conditions in the US. The market might therefore actually be encouraged to think that the next hike in US rates is not imminent and, if moves in the past are anything to go by, this could help to find a floor – for a while – in risk asset prices (until the next headline, anyway).

Stocks up, credit better, government bonds give a little back… It all seemed like a bit of short covering. Not long ago, 2%+ rises in stock markets used to be what dreams were made of. Now, they’re greeted with suspicion and a wariness that suggest a “suckers rally”. Still, we’ll take it. The precipitous decline in stocks and credit spreads was bought to a halt. The DAX popped higher and back over 9,000, with most bourses  1.5-2% higher in the day. Oil prices gained 1-3% after US inventories showed a surprise decline with WTI up at $28 and Brent at around the $31 level. While bund yields rose, peripheral yields declined suggesting some short covering in the latter as bonds had come under pressure in the flight-to-quality trade earlier in the week. US Treasury 2s/10s was down at 98bp suggesting the potential of a reversal in the course of US rate hikes. Confused yet? In credit, a recovery of sorts was inevitable given the moves in stocks. Most evidently, that came through the synthetics, with iTraxx Main a little better at 117bp and X-Over at 455bp. The cash market was also a touch better bid, but few chased it better. CA Immobilien, Bpifrance and Goldman printed a combined €1.9bn in a trio of quite unremarkable senior bank deals. That was it for primary in credit.

US stocks have closed flat, and the 10-year Treasury has outperformed, to yield 1.67% (-6bp). It was 2.0% not too many weeks ago. What’s that telling us?

10th February 2016

CoCo woes tempt elephant trade

MARKET CLOSE:
FTSE 100
5,632, -57
DAX
8,879, -100
S&P 500
1,852, -1
iTraxx Main
120bp, -2bp
iTraxx X-Over Index
462bp, +2bp
10 Yr Bund
0.23%, +2bp
iBoxx Corp IG
B+187.8bp, +3bp 
iBoxx Corp HY Index
B+645bp, +15bp
10 Yr US T-Bond
1.73%, -2bp

Looking for the next elephant trade?… At the peak of the financial crisis in 2008, parts of the the corporate bond market had collapsed. Tier 1 financial paper was trading at distressed levels and the HY market, very much in its infancy in Europe, had completely closed down, with severe price destruction. On the verge of a global financial catastrophe, the pricing action was coherent and entirely normal. Back then, it was the result of the unwind in systemic leverage bought on by the multi-year CDO/structured product boom, and it left us on the cusp of a systemic tragedy. One could easily argue that the ensuing years illustrate that it was indeed a tragedy. Central banks (the Fed) saved the day as they cut rates hard, effectively poured liquidity into the global financial system – and boom. The recovery in financial assets, with a systemic financial crisis averted, saw to it that 2009 was a great year for the recovery of distressed priced corporate bonds, with a rally of a kind never seen before. From March that year, subordinated debt and high yield markets witnessed ‘option-like’ returns as prices recovered sharply (see chart below). The Markit iBoxx HY index shows that this sector returned over 70% in 2009 as prices recovered off distressed levels (insert link). T1 returns were greater, as core European national champion T1 bank paper recovered from trading down at 20c on the dollar to as high as 90c into the end of 2009. Some will be thinking we might be able to trade a quick turn in the CoCo bond market now. Prices need to drop much further first to replicate 2009 – and they might not. But if they do, we can assure you that a coupon somewhere has been switched off, and there would be panic around the asset class. Anyway, we might be on the cusp of a financial crisis – or an existential one – for this fledgling product class, but the right words somewhere, a miracle return to sustainable growth – or just a miracle – and the hope would be that we rally off the current lows. The temptation to get involved is clear given some of the price action, but the lesson is to wait: prices likely have further to drop, and remember that the decision whether to make coupon payments resides in extremis with the regulator. We don’t think there’s the proverbial “elephant trade” in it yet.

2008-2009: Sub financials collapse and recovery

Weds Chart

Hope dies last… Asia reacted to Monday’s European carnage by playing catch-up and moving sharply lower (Nikkei dropped 5.4%), but offered little new in terms of an additional directional bias for the opening of Tuesday’s session here. Bereft of any meaningful newsflow – although the December industrial production numbers for Germany were a shocker (-1.2% vs expectations of +0.5%) – markets were managing to tread water through the morning session. Then we got direction. Equities, having played out in a narrow range, suddenly dropped on little discernible news. Government bonds were better bid again and the iTraxx indices pushed higher on the follow as protection costs rose. Once again, there was no blaming oil as prices actually held steady for most of the session, brushing aside the IEA’s latest report that the oil glut will only grow this year and prices would sag some more as a result. Stocks led the way, cash credit didn’t really come out for air and the primary market was closed. Some of the moves are ugly, but we haven’t capitulated yet, in a sense it is still too orderly. Hope dies last, but hope is still burning. Whether we go over that cliff, is yet to be seen. Anyway, the European bell-weather index, the DAX, set a new intraday low at 8,772 (at this level it was down almost 20% YTD) while others moved 2% or more lower as any earlier hopes of a calmer “let’s take stock” session were dispelled. The US opened sharply lower, recovered, played out a choppy session finally in the black and gave some impetus to the rest of the markets which then managed to close off the lows.

Impossible to trade, so don’t… As mentioned already, we have highlighted the very volatile nature of the markets in all asset classes. Oil for instance was up for most of the day and has closed some 6% lower for Brent and back with a $30-handle, and lower for WTI ($28.30). The dollar was zooming at $1.13 versus the euro. And with the US$ up at $1.13 it will be extremely unhelpful to the ECB but will likely make any decision to cut the deposit rate further (and more QE) for them much easier. The corporate bond market came under some intense pressure – marked wider quite aggressively, especially in HY. Here, we saw the Markit iBoxx HY index at B+645bp (+14bp in the session) and easily the wides by far for the year (last 12-months). A year ago, we were over 200bp tighter (the default rate hasn’t picked up and supply has fallen). The yield on the index jumped to 6.19%. These are ultra defensive marks. IG was not spared with the index spread up at B+187bp, or 33bp wider YTD. And yet, there would be demand for a new deal. Work that one out. returns in IG credit are still positive! Main closed out a touch better at 120bp and X-Over was a smidgeon higher at 462bp. And after all that, US stocks closed out flat.

That’s enough for now. Back tomorrow. Have a good day.

9th February 2016

CoCos – “designed to fail”

MARKET CLOSE:
FTSE 100
5,689, -159
DAX
8,979, -307
S&P 500
1,853, -27
iTraxx Main
122.5bp, +6.5bp
iTraxx X-Over Index
460bp, +37bp
10 Yr Bund
0.22%, -8bp
iBoxx Corp IG
B+184.5bp, +5.5bp 
iBoxx Corp HY Index
B+629bp, +20bp
10 Yr US T-Bond
1.75%, -8bp

From commodities to European banks… Few would have thought we could repeat last month’s price action, but we are doing so, with the exception of oil prices. Equities are feeling the brunt of the market’s ire at the very difficult macro outlook, while – for now – oil prices seem to have found a floor, hovering north of $30 per barrel (Brent). Risk aversion is pushing government bond yields to record lows at the front end, while longer-dated paper (and here we mean the 10-year Bund) has just a little way to go before we see new lows (0.05% intra-day). Some are suggesting that should additional QE be announced, post-ECB (long end) bonds will sell off and yields will rise again – just as they did in Q2 2015. History ought not to repeat itself, and this will not necessarily be the case – indeed, we don’t think it will be. Back then, there was hope that China would be able to manage a soft landing, that the US rate increases would be into a sustainable growth dynamic and that the eurozone would piggyback on this. The good times would roll. It is quite evident that none of that has either been the case or will be the case this year. So, the DAX took a thumping on those growth fears, closing off the intra-day lows but still down 3.3% and everything else followed. The 2-year Bund resides at a new record low yield of -0.52%, and the 5-year and 7-year benchmarks did the same. In corporate bonds, well, we just crawled back into our shell and secondary activity ground to a halt. Where there was action, it was in synthetics, and while bank shares took a pounding, the liquid proxy in corporates – CDS – moved higher as the cost of protection soared (+10-15bp in the worst cases). Down the bank structure food chain – subordinated debt, and in particular CoCos – well, we again saw very poor price action. The likes of Deutsche Bank have been well flagged as under pressure after the huge Q4 writedown, but the contagion has spread. Deutsche’s CoCos are on average down 22 points YTD, while Unicredit’s 8% dollar CoCo is off an eye-wateringl 25 points. Quality has also been hit: HSBC’s 6% euro deal is off 8 points and Standard Chartered’s 6.5% dollar CoCo 10 points, while Swedbank’s 5.5% dollar AT1 is off 7 points. The former are at distressed levels, but the latter are holding up well. After all 90c+ on the dollar isn’t too bad in this market! All the price action has occurred since January (see chart below) while the index yield jumped 60bp in the session. Generally, this bank paper is faring badly because of increasingly dire economic outlook, and that was not most expected this year (including by us). Should these fears prove to be unfounded (unlikely), we could expect a sharp recovery in prices for most of them. Don’t bet on it just yet. All we need is one of the banks to announce a coupon suspension and the floor under this market will collapse. CoCos were supposed to be the “all-singing, all-dancing” capital product created to assuage regulators and fill the depleted capital bucket post-crisis to the new higher required levels. It’s suddenly become more costly for banks to issue them – if indeed they could – and not just for investors to hold. The key message is that CoCos are “designed to fail” without triggering a bank default.

CoCo Index Bond Yields

CoCo graph 9Feb16

It’s not about the oil, the oil, the oil… We capitulated. Simple as that. With stocks down as much as they were and government bonds bid up as much as they were, we would have needed oil down by 5%+ to suggest it was motivating the weakness. Oil prices per barrel might be going lower (we think $25 dollars will be upon us soon), but the session’s moves were simply about fear. Fear around the global economy – again. Even Treasuries saw 12-month lows in yields (10-year at 1.75%, -8bp). We couldn’t really point to poorer newsflow motivating the weakness, save for lock maker Assa Abloy flagging weaker EM demand in 2016. With the DAX off 3.3% at the close, that represented an incredible 16.5% loss YTD. Other markets fared as bad or worse. Oil was down just 1.75% per barrel on average. The aversion to risk assets saw peripheral bond yields gap higher with Italian BTPs in 10-years up at 1.68% (+12bp) and equivalent maturity Bonos at 1.74% (+11bp) as even the prospect of ECB buying failed to offer any comfort. Portugal was severely punished as the Socialists cancelled the national airline’s expected privatisation, with 10-year yields up at 3.36% (+25bp). For once, we had a real flight-to-quality trade going on which saw 10-year Bund yields down at 0.22%, 8bp lower in the session. Just 18bp left to drop before we see a new low. The S&P ended just 1.4% lower and well-off the lows for the day, but the lowest closing level for 2016. Hope for a better start today?

Credit markets get a deal… We managed to get BMW on the road, as it printed €1.25bn in a dual tranche transaction. A €500m 3.4-year floater at Euribor+65bp was added to with a €750m 6-year fixed deal at midswaps+85bp. At the final pricing terms, the book was just 2x oversubscribed. Safe name, solid company and somewhere to park that cash. The running total for IG non-financial issuance YTD is now up at €9.25bn, and we do have a slew of US borrowers lined up for deals as soon as the market permits. That was not the day’s story though. It was the weakness in credit markets that was best evidenced through the iTraxx indices which saw highs of 122.5bp, 465bp and 140bp for Main, X-Over and Snr Fins, respectively. Basically they tracked equities and the lower stocks went, better protection buyers (for hedging and/or speculation) pushed the indices higher. At the close, Main was left at the session highs of 122.5bp with X-Over at 460bp – or YTD, +45bp and +137bp, respectively. Ouch. In cash, we saw severe weakness on low volumes and flows, and much of it coming from higher beta sectors (CoCos, for example). The Markit iBoxx index ended 5.5bp weaker at B+184.5bp and the widening represented the worst day of pricing action this year (surpassing mid-January’s carnage). The IG index is now 30bp wider (we expected it to tighten by 20bp in 2016). The IG corporate index yield was unchanged at 1.74% owing to the rally in the underlying. In high yield, it was a shocker. We saw a severe repricing with index spreads back up and equalling the year’s wides at B+629bp.

What’s left to say, try and have a good day. I’m free for lunch.

8th February 2016

Read all about it

MARKET CLOSE:
FTSE 100
5,848, -51
DAX
9,286, -107
S&P 500
1,880, -35
iTraxx Main
116bp, +11bp
iTraxx X-Over Index
423bp, +17bp
10 Yr Bund
0.29%, -1bp
iBoxx Corp IG
B+179bp, +1bp 
iBoxx Corp HY Index
B+609bp, +3bp
10 Yr US T-Bond
1.84%, unch

Negative corporate bond yields – Naah… The theme running through the markets at the moment is around sustaining economic competitiveness through currency devaluations; it is being driven by (central bank) interest rate cuts – and in some cases it is about taking rates deeper into negative territory. Back in Q1 2015, buying into the euphoria ahead of the ECB’s original QE announcement, it seemed that there was a real prospect of some euro-denominated corporate bond yields going negative – where else was there value as the 10-year Bund yield dropped to 5bp?! There is precedence. Given the history and prevalence of retail investors in Switzerland (as well as the peculiarities of the Swiss franc market), they are – misguidedly – buying negative-yielding corporate bonds. We don’t see any sense in it, and we certainly do not foresee any prospect of it becoming commonplace elsewhere. It’s topical again in euroland as the macro newsflow worsens and the currency strengthens (or the dollar weakens against it), leaving us edging closer to ECB “action day”. Two-year Bund yields are at -0.50%, the 10-year is heading lower (at +0.29%) and demand for safe-haven fixed income assets naturally turns heads towards the corporate bond market – and not just the double/triple-A sectors. Government bond yields go negative but still manage to find buyers because banks need to buy government bonds and other (negative-yielding if it happens) SSA paper for risk-weighting purposes, given that they are assets which fit the LCR bucket. Bank are a captive audience, so to say. For anyone else, simply don’t do it. Better put the cash under a mattress. Now we might get to the stage where yields will drop precipitously – even from these levels – if deflation becomes deeply rooted across the eurozone (late 2016, 2017?), and corporate bond prices will be bid up in that search for yield (à la Q1 2015). That would mean getting used to a lower corporate bond yield environment again. That seems like a distant prospect right now, as they’re actually heading in the other direction, with the Markit iBoxx IG corporate index yielding 1.8% compared with 1.02% a year ago. For non-financials, we saw a low yield level of 0.99% in Q1/2015, while the front-end double-A index yield is now at around 0.16% versus a low of 0.11% back then (see charts below). For funds, it is third party money that is being managed. If returns are negative then investors will pull their money out – or they should. On the macro side and longer term, if deflation sets in corporate credit quality will eventually come under pressure: that will impact the default rate as rating transmission risks increase, and sentiment towards the asset class will take a knock. Before that happens, don’t forget event risk. The mattress it is.

Corporate Yields by Rating Category

Corp Index Yields by Rating

1-3 Year Non-Financial Yields

Front-End Corp Index Yields by Rating

Non-farm payroll report leaves everything to play for… Stocks sharply lower, Treasuries sold off and, after a non-farm/unemployment print and not knowing anything else, that would mean a rate increase is on its way. Classic economics. However, at 151,000 jobs created – lower than the 190k consensus, albeit with the unemployment rate below 5% – we think the print was bit indifferent. It was not low enough to blow the potential rate hike for 2016 out of the water, but nor was it high enough to suggest one is definitely coming soon. It does add to the gloomier data we have seen out of the US these past couple of weeks, though. Our view is for no hike in the first half, as the Fed will consider global conditions and the impact any additional tightening would have on extremely jittery global markets. Anyway, we ended the week just as we played out the rest of it – nervous and weak. Choppy and then sharply lower global stocks, nervous credit (quiet in cash, considerable weakness in synthetics), oil in a tight range for once and other (corporate earnings) newsflow not great. It looks like we are set up for another difficult open today, given the accelerating losses into the close in the US last Friday.

Corporate bond market refuses to panic… When all’s said and done, we can only hope to put the US rate situation to one side and get some stability on markets so that, in credit, we get more supply to aid a bit of confidence. Spreads played out in a tight range through Friday’s session and were only moderately higher in the whole week. Commodity paper bounced hard (several points), but when stocks are rising as they did for the likes of Anglo, illiquid corporate bonds will do the same. The Markit iBoxx IG corporate index closed at B+179bp, just 5bp wider in the week. While non-financials have held up well, financials are coming under intense pressure and scrutiny. The weaker economy and poorer earnings (particularly for those with investment banking franchises) are resulting in some severe price action. AT1 paper (especially Deutsche’s – but they are not alone) has been hammered. In high yield, we closed out 3bp higher for the Markit iBoxx index at B+609bp and just +14bp for the week as a whole (B+630bp is the index wide from mid-January). There have been outflows – especially in some retail funds, over the past few weeks – but the market is handling that quite well. On the flip side, there is certainly demand for risk: we just need primary. Last week saw just that and took the total IG non-financial issuance, year to date, to €8bn. And there is enough of a pipeline to possibly take us over the €10bn mark with a flourish, and not limping over that line. That will obviously depend on macro, stocks, sentiment, oil and the dollar. Amgen, Honeywell, LyondellBasell, United Tech are the US corporates in the throes of roadshows, while we are absolutely sure European entities will be looking for their moment (no need for them to telegraph their intentions). HY supply has moved up to €1.2bn after several small taps last week.

The numbers look dire… iTraxx Main closed 5bp wider at 110bp and X-Over at 422bp (+16bp) illustrating the severe risk-off nature of the session. These are easily the current contract wides. The secondary corporate bond market has a much different technical dynamic and pretty much closed, but in primary, Schlumberger managed to get a €600m deal away. In equities, the DAX was at 2016 closing lows, and some 14% down this year already! The level of bond yields everywhere might be signalling a recession to come – but bond yields are also at these very low levels because of mass market manipulation by central banks (QE, in other words).

To end on a happier note, the Credit Market Daily welcomed its 1000th sign-up last week. Back tomorrow, have a good week and be very careful out there.

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