Suki Mann

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17th September 2015

Sock it to me

MARKET CLOSE:
FTSE 100
6,229, +92
DAX
10,188, +56
S&P 500
1,978, +25
iTraxx Main
70.5bp, +-2bp
iTraxx X-Over Index
324bp, -9bp
10 Yr Bund
0.77%
iBoxx Corp IG
B+148.3bp, -0.5bp 
iBoxx Corp HY Index
B+473.8bp, +2bp
10 Yr US T-Bond
2.29%

The 25bp isn’t the issue… What the subsequent communiqué dishes up will matter more. Still, it won’t mark the end of the multi-year halcyon period for the corporate bond market in Europe. We should be focused on the eurozone inflation figure, which came in lower than expectations at 0.1% for August – and we suspect more than a few corporate bond market investors were inwardly warmed by it. I know I was. That sort of figure suggests that the ECB has more work to do and that an extension of the current asset purchase programme in longevity and scope is a fait accompli. Treasury and Bund yields are most likely going to see more divergence should the Fed raise rates. The latter yields have been dragged higher in the last session or two as Treasuries sold off, but we suspect the link will become more tenuous into the next few months. And the need for yield in European fixed income means more demand for corporate bonds. The corporate market has become bit of a safe haven in the past few years, boosted by systemic liquidity creating an easier refinancing environment, and leaving a supportive rating transmission dynamic and extremely low default rates. The headlines in this low-growth era have been surprisingly kind to corporate bonds and will continue to be so as liquidity works its magic for a while longer. The persistent low-inflation environment also makes a folly of the past several months of weakness in corporate bond spreads, which have now hit 18-month wides. We are looking at a fantastic opportunity to add some cheaper risk here.

No longer a hidden subliminal message… August CPI fell in the US (-0.1%) and just adds to a myriad of indicators which are sending out contrasting signals. There is no, low or negative inflation, depending on which definition one chooses. We have tight labour markets in the US and UK, but sluggish wage growth. Nearly every month we are surprised by solid industrial production numbers from Germany. Now the OECD is downgrading its global growth figures. That concoction is such a mish-mash of ingredients that policymakers are having to contend with, it’s no small wonder that playing it safe with loose policy is seen by most as the best option. So get on with it, the message is hardly subliminal any more. Buy corporate bonds.

Closed for business on Thursday… We were effectively closed on Wednesday too, with nothing we could really get excited about on the primary front. LeasePlan was the closest we got to an IG non-financial corporate, and the most noticeable thing about the deal was the smaller coverage ratio (in the 2-3x range) for the Eur500m, 3-year offering. Low triple-B rated property group Akelius’ Residential rounded off this pre-Fed issue-fest with a Eur300m, 5-year transaction. There was the usual smattering of unexciting covered and senior deals, while the ESM took 10-year funding. S&P slipped in a one-notch downgrade of Japan’s sovereign rating to A+, bringing it to the same level as Moody’s rating (A1).

And the rest… On the surface we sat through a good session, as the markets were spurred on by a good ol’ rally in equities. Over 1% in most bourses saw to it that credit was going to better bid for choice. Nevertheless, the iTraxx indices were better offered, cash though recovered just a little of the recently lost ground but the crop of  ‘cheap’ deals in primary were on the front foot. Fickle, but then it always is. We’re probably done as far as the heavy lifting is concerned from a business perspective for this week. The Fed later will effectively leave us with a long weekend in which to ponder how we will close out the quarter and the year.

Our thanks to all those who voted in our Fed rate poll. Over 70% of respondents think that there will be no hike tonight.

16th September 2015

Rational exuberance to extreme caution

MARKET CLOSE:
FTSE 100
6,138, +53
DAX
10,188, +56
S&P 500
1,978, +25
iTraxx Main
72,5bp, +1bp
iTraxx X-Over Index
333bp, +5bp
10 Yr Bund
0.74%
iBoxx Corp IG
B+149bp, +1.5bp 
iBoxx Corp HY Index
B+475bp, unch
10 Yr US T-Bond
2.29%

Rational exuberance comes to an end… Nature abhors a vacuum, and the markets hate uncertainty. Chinese stocks went another 3-4% lower depending on the index, Asian equities followed suit, Europe and US equities are up – but only after US data saved the day, iTraxx index levels are a small up and cash credit spreads weaker for choice. The Fed has the market at its mercy, it would seem, and it all looks rather dramatic. We don’t think it ought to be. We know the Fed will move, if not on Thursday then most likely in October. Most are positioned accordingly, but it looks like the green light is needed before we can get on with it. Our website poll thus far has two-thirds of voters expecting no move this week. In the meantime, the market is acting as if it was caught in the headlights. Thank heavens a 25bp hike isn’t going to directly impact the European corporate bond market. In fact, it should make it relatively more attractive for absolute return funds, for example. Other asset classes might feel some heat as money is shifted from EM, some FX trades are unwound and US stocks perhaps come under pressure. But the spiral of contagion will not blow a hole in the corporate bond market here, just bring some weakness at most. Relax.

Extreme caution all of a sudden in primary… There’s money to put to work, but suddenly the markets have turned all skittish and are demanding more from borrowers. We suggested in yesterday’s comment that new issue premiums were on the up, that deals were failing to catch fire even so and that there has been too much issuance in too short a space of time. Theoretically, increasing those premiums ought to make deals a shoo-in, but that hasn’t been the case (with book sizes/coverage ratios still falling), and so the underperformance on the break is being driven by the current caution. Still, that didn’t stop mid-single-A rated DSM, which lobbed in a huge near-30bp NIP based on the initial price guidance for a 7-year, Eur500m no-grow transaction. The final pricing level, at midswaps+75bp, only saw the premium to fall to 20bp. That’s high for a low-beta industrial, especially taking into account that DSM was the sole non-financial corporate borrower in the market today and got away unopposed. In financials, the pick of the bunch was the AT1/CoCo deal from ABN, offering a final coupon of 5.75% for the Eur1bn-sized issue and where the book was a more glowing Eur3.5bn+.

Red turns to black on mixed US data… The equity markets in Europe languished until US retail spending registered a healthy rise in August, giving a fillip to most who chose to ignore the weaker manufacturing reports. The gains were picked up into the close, with most stock markets up by over 0.75% having been down by that much before. For credit we kind of followed suit, but corporate bond markets are lumbering in nature compared to their equity brethren. In the synthetic space, iTraxx Main was up a little at 72.5bp (+1.5bp) and X-Over at 333bp (+5bp). In cash, another weaker tone saw the iBoxx index close at B+149bp, some 1.5bp wider on the day and mainly on higher beta sectors under some pressure from Street marks rather than better sellers. Underlying yields have jumped higher (10-year Bund +9bp) and returns are going to look poorer.

Eurozone inflation data is out this morning.

15th September 2015

I don’t like Mondays

MARKET CLOSE:
FTSE 100
6,085, -33
DAX
10,131 +8
S&P 500
1,953, -8
iTraxx Main
72bp, +1bp
iTraxx X-Over Index
332bp, +4bp
10 Yr Bund
0.65%
iBoxx Corp IG
B+147bp, +1.5bp 
iBoxx Corp HY Index
B+476bp, +5bp
10 Yr US T-Bond
2.18%

A Monday before a crucial Fed meeting… And there’s not much to like about it. Just sitting around, waiting for something to happen – a new deal or two on the screens, perhaps even a client enquiry, but no real fresh, directional trade to put, on especially when the Fed decision on a rate move at this crucial juncture could go either way. The Chinese industrial output and fixed asset investment numbers out over the weekend were poor, leaving Chinese stocks to fall by almost 3%, but bourses in Europe were unperturbed by the drop. That would not have been the case – and wasn’t the case – a couple of weeks ago. Maybe it’s because it has happened so often, that the “boy who cried wolf” syndrome has hardened us to big moves in Asian stocks. Still, the weaker numbers point to lower demand as the Chinese economy goes through what will be a prolonged and painful rebalancing, which in turn means low(er) commodity prices for longer, and reduced consumer demand and the like for an extended period. It leaves Wednesday eurozone inflation figures likely to be anchored around zero, with little or no hope of a pick-up anytime soon. That means markets expect that more QE is on the horizon and further easier policy will give equity markets a boost. That rising tide lifts all boats. Easy really. We got our fill in primary, as we suggested we might in our previous postings. Statkraft, Pentair, a three-tranche deal from Sanofi and Pernod Ricard all kept the market focused. The downside at this moment is that building a ‘decent’ book is becoming bit of a struggle (see below).

New issue coverage ratios fall, NIPs on the up and performance wanes… In primary, Norway’s Statkraft raised Eur500m at midswaps+85bp in 8-year funding (book just over 2x, NIP of around 15bp) and Pernod Ricard (Baa3/BBB-) lifted the same amount in the same maturity. Sanofi became the latest of a growing number of entities doing three-tranche deals (one being a floater). Commerzbank was in for 7-year maturity senior fixed funding and BPIM was on the screens for a 3-year. The books on the deals are now falling into the 2-3x category rather than 4-5x or more while new issue premiums are also on the rise, which suggests a bit of indigestion (it has been a very heavy couple of weeks) or caution about adding pre-Fed. It doesn’t help that last week’s new deals have come off a little too (ITV +10bp), with few stepping into the breach to lift the cheaper offerings in secondary. As for ProSiebenSat, the media group pulled its deal following the investor call last week, and it seems the market won’t take down anything that is thrown at it after all.

Elsewhere, we fail to lift off… The synthetic indices played out in a narrow range and ended better bid (higher), while cash corporate bond also languished, not helped as the session progressed by the weaker performance in the equity markets. Most of Europe ended 0.5% or more in the red, the DAX being the exception as it closed flat on the session. The US was trading lower too into the European close, seeing to it that there would be no late recovery. September has been a quite horrible month for corporate bond valuations. The iBoxx IG corporate cash index was again higher into Monday’s close, this time at B+147.3bp or 1.5bp wider in the session, with the HY index also giving up ground to B+476bp (+5bp). The IG index level was last seen in October 2013! Yet, we have no corporate bond crisis – far from it. The weakness was clear everywhere with few stepping in, as mentioned above. Hybrids and CoCos took it on the chin. For HY, we’re just a basis point off the widest index level this year. And finally, for the synthetic indices, Main was up at 72bp (+1bp) and X-over weaker at 332bp (+4bp).

Don’t forget to cast your vote in the Fed ‘rate hike poll’. As it stands, the ‘no rate hike’ camp are in the ascendancy.

14th September 2015

Fed up? The wait’s nearly over

MARKET CLOSE:
FTSE 100
6,118, -38
DAX
10,124, -87
S&P 500
1,961, +9
iTraxx Main
71bp
iTraxx X-Over Index
328bp
10 Yr Bund
0.65%
iBoxx Corp IG
B+145.7bp, +2bp 
iBoxx Corp HY Index
B+471bp, +4bp
10 Yr US T-Bond
2.19%

All eyes on the Federal Reserve… The US interest rate decision can’t come fast enough. Many ought to be put out of their misery, one way or another. We’ve been on tenterhooks long enough and the market will be tetchy into it, hopefully relieved after. That’s how it usually plays out – and it probably will again. And that’s because whatever the Fed does, it will most likely be a damp squib, with most of the worrying over and positioning already in place. If it raises, we will likely get a bit of volatility into the end of the week, with some more pondering as to what this might mean for EM, FX markets, equity valuations, US-versus-eurozone asset performance and so on. If it doesn’t, we will still get something of a wobble as we all consider whether it will do it ‘next time’, and give some thought to the idea that the Fed might be behind the curve and need to raise in October or December (perhaps more than 25bp). But once the thinking, writing, comments are all done, we will settle and probably trade higher in most asset classes. Much ado about nothing, so to say. True to form, we closed out Friday with these worries ensuring all erred on the side of caution. Oil futures fell, thought was given to China’s busy weekend of data releases, equities trended lower in Europe, govvies got a better bid and credit was weaker by some margin. Still, we should not be surprised by the market reaction, and for credit it wasn’t a big deal. After all, a couple of borrowers chanced their arms on Friday and got deals away ahead of what could be a busy opening couple of sessions into the Fed’s get-together.

Thank goodness for the primary markets… Because the corporate bond market would be a morose place if the window for issuance was closed: secondary markets are not exactly chock-a-block with liquidity, activity or decent volume. The week just gone was a very good one, with issuance levels higher than most could have reasonably anticipated. According to Dealogic data, Eur206bn has been raised by IG non-financial corporates so far this year (Eur282bn is the record for any given year), and the Eur14bn last week alone makes it the third-best week of 2015, the other two coming back in that mid-Q1 period. On Friday, low triple-B rated ITV slipped in with a Eur650m, 7-year transaction at midswaps+162bp. Italy’s A3/A- rated Eni paid up for 8-year funding at midswaps+105bp, offering a decent 10-15bp new issue premium which was necessary given the weakness in the market in the session and a not so impressive order book of below Eur1.5bn. A quieter period now wouldn’t come amiss, helping us all properly digest last week’s deluge and leaving us to focus on the post-Fed dynamics.

Taking stock with two weeks to go to quarter-end… And corporate bonds are having bit of a soggy time of it lately. IG corporate spreads as measured by the iBoxx index closed out up at B+145.7bp, or +3bp on the week and +2bp in the day. We are creeping higher at the moment, and it doesn’t make for good viewing given that the current index level is some 51bp higher than the Q1 tights. YTD IG returns are now at -1%. That’s not panic, it’s just some repricing in the face of the huge supply. Interest in paper is as strong as ever, witnessed through the demand we are seeing for new issues and the lack of any noticeable outflows from corporate bond funds in Europe. We continue to believe that if pockets of liquidity emerge in fancied bonds, then this is a buying opportunity. In HY, we closed out at B+471bp, +4bp in the session and on the week. The consistent edging wider means we are now just 7bp off the August wides. And it makes for bad viewing that the current HY index level is 100bp off the year’s tightest mark. Returns are up at +1.5% YTD though, which soothes much of the pain. We explain some of the weakness in IG spreads as a repricing impact coming from the fall in stock markets, with returns hit by the rising yield environment given that the underlying has backed up considerably. Copious supply levels of late have also had an impact, but this usually has only a short-term effect on spreads and we think it will blow over as soon as we get several quieter sessions, leaving secondary markets to recover. We have previously forecast that IG spreads can get into the B+120bp area – that’s not impossible into what is usually a decent quarter for the markets through Q4.

And finally, the UK Labour Party has a new left-wing leader, and Chinese data missed on many fronts with fixed-asset investment, factory output and growth in real estate investment all coming in lower than expected. Eurozone inflation (or the lack of it) is out on Wednesday. A weak(er) number and the market will expect an additional policy response from the ECB.

Have a good day.

11th September 2015

Show Me the Money

MARKET CLOSE:
FTSE 100
6,156, -73
DAX
10,210, -93
S&P 500
1,953, +10
iTraxx Main
71p, +-1bp
iTraxx X-Over Index
327bp, 1bpp
10 Yr Bund
0.69%
iBoxx Corp IG
B+143.8bp, +1.5bp 
iBoxx Corp HY Index
B+467bp, +0.5p
10 Yr US T-Bond
2.22%

Splish, splash, I was taking a bath… Nothing boring, fickle or keeping us just ticking over in the corporate bond market on Thursday. We were inundated with heavy levels of issuance, which is now likely going to be enough to close out this week. Friday ought to be a quieter session while next week we will be in full FOMC mode, but where we don’t rule out some decent primary market activity ahead of the long awaited Wed/Thur meetings. Apple Inc was in for a dual tranche funding, plumping for the same maturities (8 and 12-year) as its previous foray into the market. It obviously works for Apple to get more funding away in euros and the market was very receptive, no doubt also enticed by the healthy initial new issue premiums on offer as well as the kudos of holding some Apple paper. And that was against a background of US rate and Chinese growth jitters – again – leading to equity weakness (-1%), a rate cut in NZ and poorer capex data from Japan. At the other end of the scale, Portugal’s EdP was out there with a hybrid issue (sub-investment grade rated) at a very enticing 5.5% yield and a PNC5.5 maturity, while the book wasn’t bad at just under Eur2bn for the benchmark issue. There was a time when EdP was locked out of the market completely along with all other peripheral-based borrowers, circa the 2010 crisis, and they re-opened it for Portuguese borrowers in senior funding with a 5.875% coupon in 2011. It’s a funny old world.

Heaviest day in primary for a while… Apple (clipping a combined Eur2bn) and EdP were kept company by a triple-tranche offering from Shell, as well as deals from Ford Credit Europe,  Estonia’s Eesti Energia (18s and 20s previously tendered) and Carrefour-owned shopping mall operator Carmila. Shell were busy with 4-year funding (floater), a 6.5-year issue and a 10-year at midswaps+67bp and midswaps+90bp respectively for the fixed legs. Shell raised a total of Eur3.45bn. FCE Bank clipped Eur700m in 4-year funding at Euribor+98bp, while Eesti took a larger than anticipated Eur500m in 8-year at midswaps+160bp. Carmila raised Eur600m at midswaps+170bp, also for an 8-year deal. There’s still no sign of indigestion anywhere.

Punch drunk with primary, secondary activity at low levels… And so goes it to type. The plan is to flood the market with copious amounts of issuance and not to worry about the lack of activity in the secondary market. Absence a real crisis that leads to fund liquidations/outflows (actually, it would mean returning to a sustainable growth dynamic such that equities are a better bet than fixed income) few are really concerned with the inaction in secondary. The till is collecting the fees from elsewhere. Most deals are performing and inflows into credit funds need filling. It’s been a very good week in that sense. Elsewhere today, we had iTraxx move wider as the synthetics took their lead from equities. Cash played out in a narrow range with focus clearly elsewhere but spreads were wider. Weakness was in CoCos saw them being up to 0.5-cash points lower (tracking mainly equities), some hybrid paper edged lower in price too, and there was obvious widening in Apple secondary paper by up to 10bp on the back of the new deal.

The iBoxx corporate IG index closed at B+143.8bp and the HY index at B+465bp, while iTraxx Main was up at 71bp and X-Over slightly better bid at 370bp. The S&P closed higher, and that should help us hold steady today.

Here’s hoping for a quieter and reflective Friday.

10th September 2015

Buy the dip

MARKET CLOSE:
FTSE 100
6,229, +83
DAX
10,303, +32
S&P 500
1,942, -27
iTraxx Main
69bp, -2bp
iTraxx X-Over Index
319bp, -11bp
10 Yr Bund
0.70%
iBoxx Corp IG
B+142.4bp, -0.5bp 
iBoxx Corp HY Index
B+462bp, -5bp
10 Yr US T-Bond
2.19%

Fickle markets on the rise… It was only a few days ago that the prospect of a Fed rate rise, allied with the subsequent potential for further market volatility from China event risk, had all of us on tenterhooks. Pfff, there’s been nothing of the sort. Well, it depends how the market chooses to look at it. Not quite on fire, but if we hold this bullish mood, a US rate rise might offer only a day or two of jitters before we are off and running to end the month/quarter on a high. It’s certainly looking like that is what might transpire. Sentiment is boosted by continued hopes of Chinese intervention to help prop up its economy and stock market, while action from individual corporates to address their problems (Glencore, for example) and some better than expected economic data (Germany) has fed into the current upbeat mood. Small things matter. The bottom line is that the global economy is under pressure – it might be going down, but it won’t go without a fight, with central banks looking to use whatever fiscal and monetary tools they have left in their armoury to keep it all ticking over. The salutary lesson is to buy the dip. Admittedly, it’s not that easy as far as the euro-denominated corporate bond markets are concerned, given that secondary market liquidity is so poor even when spreads go (are marked) wider. But should pockets of liquidity emerge, then we think it is a good opportunity to buy into any perceived weakness.

German drive-through in primary… Daimler and BMW were noticeable for their endeavours in primary, while German investment group JAB Holdings (Baa1/BBB+) and packaging group DS Smith (low triple-B) also launched non-financial transactions. They all combined to keep the printing machines well-oiled. The deal flow keeps coming and seems plenty at the moment to satiate investors’ demand for corporate paper. The Daimler 2-year floater was nevertheless completely uninteresting, as was BMW’s 3-year one, although the latter also funded in 6-year, for Eur1bn at midswaps+65bp (-10bp versus IPT). JAB and DS Smith plumped for 7-year deals at midswaps+160bp and 172bp respectively, with the latter 11bp tighter into the close. DS’s reoffer was around 8bp tighter than IPT and the big upside suggests that higher beta deals are still much sought after. Oh, and the market loves a new name. The BMW deal edged out a basis point on the break. All three fixed offerings today garnered books of over Eur2bn each. Triple-B plus rated Technip is roadshowing next week.

UK misses everywhere, little chance of a rate-hike… Manufacturing and industrial production in the UK both missed for July, while the trade deficit widened. The Bank of England isn’t going to risk it all by raising rates. We’re not alone in thinking that, and the FTSE initially rose by 2% on those numbers, leading the way for all European bourses. There was some pullback from the highs on the strong job-openings report in the US. in early trading, two-year US treasuries went up to 0.75% (+2bp) and the 10-year by 5bp to 2.23%, while the 10-year Bund edged up to 0.70%. Into the US close, we were off those higher yields in the US and equities down 1.4% on renewed growth and rate jitters. Ho hum. In Europe, credit markets took their cue from the equity markets’ mini-bull run and moved a little better, with the iTraxx indices lower (better offered again) and cash spreads tighter, and higher beta issues leading the charge. The more aggressive rise in underlying yields in the US also highlights why euro-denomoinated credit is better placed to perform versus dollar-denominated corporate bonds. The iBoxx cash corporate index managed to close at 142.5bp (-0.5bp)and the HY index at B+462bp (-5bp).

With that weaker close in the US overnight, with the S&P and Dow both down around 1.4%, look for a weaker start to the session today… happy hunting.

9th September 2015

Just saying how it is

MARKET CLOSE:
FTSE 100
6,146, +72
DAX
10,271, +163
S&P 500
1,969, +48
iTraxx Main
71bp, -1.5bp
iTraxx X-Over Index
330bp, -5bp
10 Yr Bund
0.67%
iBoxx Corp IG
B+143bp, unch 
iBoxx Corp HY Index
B+466bp, -2bp
10 Yr US T-Bond
2.19%
Boring is good… Investing in corporate bonds was never meant to be an enthralling or captivating pastime. Yet we make it so, and over the past few years we have gotten all cock-a-hoop when greeted with a flurry of issuance. Poor secondary market liquidity means that the ability to trade (in size) at a reasonable price has been lost on us. So the scramble to get bonds on board in primary – the adrenalin rush which comes from winning a mandate, the high-fiving when IPTs are tightened up and the relief for borrowers that deals are launched without too much or even any altercation, is palpable. But really, it ought not to be that melodramatic. For investors, buying corporate bonds ought to be for the long term: buy, hold, clip the coupon and move on to the next deal. Yet they worry about liquidity, allocations, a basis point of movement on the break which might go against them. Event risk through M&A, releveraging and say jump-to-default ought to be the major structural worry. For regular borrowers however, the process has become somewhat mechanical, while the opening up of the corporate bond market since the crisis (central bank easing, low yields, copious liquidity) has created a depth and breadth where even non-frequent borrowers are now able to raise monies without too much fuss. The euro-denominated market is now a Eur2tn one, up from around Eur700bn some seven years ago. We have critical mass, and certain processes are becoming more mechanical. Syndicates play their part, but soon enough that role might possibly start to diminish. Time and more maturity will tell.

Up, up and away… Chinese imports may have fallen hard, but German trade figures dominated on the macro front giving the markets a filip to trade better. Equities in Europe traded up by over 1%, credit edged tighter and the iTraxx indices were better offered (lower). We had some issuance into the improved tone, although only Swisscom’s issue (A2/A) was of real note in the non-financial sector as the issuer came with a Eur500m, 10-year at midswaps+80bp (and a huge 15bp tighter than the initial price talk). Why bother with the huge initial premiums? After all, the demand is there, it’s not rocket science. And as mentioned above, with respect to less frequent borrowers able to get deals away, Finnish shopping centre group Citycon was on the screens for Eur300m of 7-year funding at midswaps+175bp (mid-triple rating), offering a decent 10-15bp premium.

Secondary spreads go with the flow… Secondary markets have seen much more limited activity for what seems like an age and this session was no different. Still, they delivered what we expected in line with higher equities. Spreads moved tighter. And so the week which began very modestly on the front foot continued with us edging very slightly better. It left the broader indicator of the market, measured through the iBoxx index, at B+142.9bp and barely better, but higher beta sectors did record some upside in Tuesday’s session. Once could argue that the machine has to slow – it has, and the FOMC is looms large.

8th September 2015

Labor Day respite over

MARKET CLOSE:
FTSE 100
6,075 +32
DAX
10,109 +71
S&P 500
1,921
iTraxx Main
72.5bp, -2bp
iTraxx X-Over Index
335bp, -5bp
10 Yr Bund
0.66%
iBoxx Corp IG
B+142.9bp, unch 
iBoxx Corp HY Index
B+467bp, unch
10 Yr US T-Bond
2.12%

Heigh ho, it’s back to work we go… Happy Tuesday! Labor Day in the US yesterday saw to it that the market would make no more calls on US rates to aid the uncertainty and volatility that have plagued us recently. Few were going to get involved in taking a view on ‘what next?’. Equities were nevertheless lively early on, despite China’s equity drop overnight along with the small matter of nearly $100bn leaving its huge FX reserve coffers in August – mainly because Glencore was selling assets to reduce its debt load. The news was very credit-friendly, as it included suspending dividends in the package. Tesco added to the credit-friendly news flow, announcing the sale of its Korean business for £4bn. On the downside, German industrial production data for July was a little lower than expected. The rally steadied and we were closing the session off the highs, and credit markets followed suit with only moderate upside. Secondary just edged a little better. We saw some primary activity in covereds, unsecured financials and even in corporates. Just to keep us all ticking over nicely.

Spanish borrowers dominate primary… Telefonica kicked off with a 6-year, Eur1bn issue at midswaps+98bp, while Spanish utility Iberdrola chipped in with an 8-year, Eur500m deal at midswaps+100bp in 8-year funding. New issue premiums were cut significantly to 8bp and 5bp respectively. Iberdrola’s deal was 8x oversubscribed! The deal was up on the break, but the 2x oversubscribed Telefonica deal was a touch weaker versus reoffer. Iberdrola got it right for investors, although they both got their funding in. Bank of America graced us with a couple of unspectacular tranches to populate the unsecured senior financial space. Amid all the noise around US rates, China’s slowdown and potential for additional action from the ECB leaving equities in particular volatile, the follow-through into the corporate bond market has been fairly restrained. Our market has not panicked at all and spreads have edged just a touch wider in the first proper week of post-holiday trading, while the new issue market has been flying. This level of macro uncertainty and volatility ought to have seen less supply. Instead, the level of activity in primary has confounded the sceptics, me included. Furthermore, it has been taken down very well, with most issues trading up versus re-offer levels. This augers well for the corporate bond market in Europe overall. For instance, smaller deals likely from the likes of Camilla, DLR, Pentair, Swisscom and Achmea ought to sneak through without too much difficulty.

Secondary quiet… Glencore paper was up to 80bp better but had been battered over the past few months into the commodity sector’s generally poor performance. Tesco paper was up to 5bp better. Equities were higher by around 0.7%, helping to support other markets and we managed to edge a little better in credit. 10-year bund yields moved a couple of basis points lower to 0.66%. Oil prices fell though by around 3%. At the close of last week, the iBoxx index lost 3bp in IG so today’s albeit modest tightening was welcomed, the index at B+142.9bp. The weakness in corporate spreads when we get it stems from the Street’s more defensive marks rather than being driven by any significant selling by investors. At best, investors are sidelined into macro/equity-induced volatility, and are better buyers otherwise, hence the bid for all things new issue. After all, there is scant liquidity elsewhere in the corporate bond market. This has been the pattern for several years and will carry on being so for a while yet.

7th September 2015

Stickin’ up for the little guy

MARKET CLOSE:
FTSE 100
6,042, -151
DAX
10,038, -280
S&P 500
1,921, -30
iTraxx Main
74.5bp,+2.5bp
iTraxx X-Over Index
340bp, +10bp
10 Yr Bund
0.67%
iBoxx Corp IG
B+143bp, +1.5bp 
iBoxx Corp HY Index
B+467bp, +3bp
10 Yr US T-Bond
2.12%

Favouritism, fear of failure or just greed… Alas, it looks like the authorities are finally in the process of addressing the issue of allocations in the primary bond market. This matters, because all manner of decisions are impacted by allocation – to hold, to flip, to buy more, as well as what the success or failure of a deal means for the current state of the market. But it goes further. The current process, broadly speaking, sees to it that certain investors – usually the larger players – can effectively guarantee the success or perceived failure of a newly launched offering, market conditions aside. They are able to take a sizeable chunk of most deals, as they have the highest absolute skin (money to invest) in the game. One could argue they bear the brunt of much of the risk if the deal does not perform, so it is only fair. That said, not long ago, as part of the pricing (and deal sizing) process, investment banks used go on a ‘price discovery’ exercise with a number of ‘important’ market participants, especially in the case of borrowers perceived as being more ‘difficult’, or in times of market stress. After all, no one wanted a failed launch. However, this price discovery process has disappeared, as investors do not want to be wall-crossed. Still, once the deal is announced conversations can take place.

Who’s looking out for the little guy?… The story goes something like this: after some marketing, putting the deal on the screen, building books and so on, the allocation process usually sees that the ‘big guy’ gets his bonds (or a decent percentage of his needs) – still. Usually, he has put in a sizeable order (maybe a so-called lead order), which can then sometimes be communicated to the broader market. Or leaked. Anyway, going back a step, the book-building process sees that the size of the book, as it grows, is somehow communicated. We note that for an SEC-registered deal, you cannot do an update on book sizes until after pricing. That is an obvious first step for the euro market. Anyway, the ‘little guy’, fresh with this bookbuilding communication/information and not wanting to get left behind, then piles in. He is not going to be the mainstay of the deal’s success or failure, and a final allocation will usually see him get less than hoped for – or nothing. Therefore, he more often than not inflates his order, playing into the hands of the banks who herald the tremendous demand for the deal. So the book builds some more and other orders – usually inflated – follow. Voilà! A Eur500m deal is for example 4-5x oversubscribed, but the ‘real’ demand is actually much lower. Who cares? The borrower gets his funds and pricing is nearly always better than the initial price talk (IPT). Happy borrower. As for syndicates, we agree they only publish actually book sizes which are derived from client orders – concerned at the Market Abuse Directive (MAD) – and will not mislead the market. But they happily take inflated orders, take on no risk through this process and pocket their fees. Happy banks. The ‘little guy’ is left frustrated as the issue is launched, is free to trade, might trade up or down, and he has no control – and usually only a few bonds. Who cares? We move on to the next deal.

And the rest – well, it gets interesting… Manpower (Baa1/BBB) slipped in a deal ahead of the NFP numbers at the end of last week, confounding most that Friday would be a non-event. Mind you, the deal was only for Eur400m (on a Eur1bn book), so not in the benchmark, although it seemed reasonably priced before being tightened to midswaps+125bp (-15bp versus IPT) for 7-year funding. Away from that, equities chose early on to give back their gains of the previous session, and then gave back some more following the good but lower-than-expected payroll of 173,000 jobs added in the US (unemployment rate down to 5.1%). That’s effectively full employment in the US and an average run rate of over 220,000 jobs added in the last 3-months after revisions. The market now thinks a hike is coming in a couple of weeks, hence the ratchet lower in stocks (S&P -1.5%, Dax -2.7%). And it gets interesting now with a potential tightening of monetary policy in the US and room for loosening in Europe. The fork is skewered as we head in different policy directions. Until we get that Fed decision on the 17th, the markets are going to remain very edgy, while EM fund outflows could possibly accelerate into it. They certainly won’t slow. The likely defensive nature of investor dynamics/sentiment over the next two weeks will leave stocks volatile – the front of the US Treasury curve might see some weakness while the back end stays fairly anchored. In Europe, we will decorrelate from the US as govvie yields play to the tune of the data in the eurozone and potential for additional accommodative ECB policy. It’s a decent data week ahead as well, with trade and inflation numbers from China, and industrial output and trade figures out in the eurozone. The US is closed for Labor Day on Monday.

Finally for corporate bonds… We’re not going to ratchet tighter as far as spreads are concerned because macro uncertainty and equity volatility will act as inhibitors, but we should hopefully gain some performance. We closed a little weaker in corporate bonds across the board at the end of last week, the usual higher beta sector under most negative price action (CoCos and hybrids), with only the new issues really managing some obvious performance.  We expect Europe will outperform the US in spread and absolute terms. Higher rates in the US possibly leading to higher yields will eventually eat into returns, for example. Euro-denominated credit will continue to benefit from low(er) yields while demand for corporate risk is going to stay robust in the face of a continued low-yielding environment and a need for a higher yielding, safe-haven investment.

4th September 2015

That was the week that was…

MARKET CLOSE:
FTSE 100
6,194, +111
DAX
10,318, +270
S&P 500
1,951, +2
iTraxx Main
71bp, -3bp
iTraxx X-Over Index
330bp, -8bp
10 Yr Bund
0.72%
iBoxx Corp IG
B+-142bp, +1.5bp
iBoxx Corp HY Index
B+463bp, +3bp
10 Yr US T-Bond
2.16%

Thank heavens for the upcoming non-farms report… Because it brought the opening week of the post holiday period to a much needed albeit premature end. Friday will be a non-event, with moribund markets – as few will want to do much ahead of the US payrolls report later and will be pondering their moves for next week. There will be much to reflect on with those payrolls and it could be a nervy week to follow depending on the number. Market participants in all asset classes will be sidelined today, so expect a quiet session after a fairly edgy start to this opening week of September. The Fed actually has its work cut out whatever the figure, needing to look at the global situation as it reflects on the right course of action to take on domestic rate policy. My view is that there should be no rate move. Markets are global, and that huge interconnection now between them means that it will matter, possibly, what they do. If they raise rates at the next meeting in mid-September, the language of the subsequent communique will determine the level of market volatility, the reaction of the different asset classes, fund returns and which is going to be the best asset class to be in. If the language is soothing, any rate adjustment higher will be greeted with a potential rally, treated as a damp squib and we’ll have a good run into year-end. The threat of more hikes in subsequent meetings will likely offer us more volatility and the need for a more defensive attitude through to the end of the year. Simple, really.

Accor giveth with right hand, taketh away with the left… We were not disappointed from today’s new issue activity with Suez (A3), Accor (BBB-), Honda (A1/A+), Heineken (Baa1/BBB+), Scania (A-) and Kerry Group (Baa2/BBB+) providing the fill for us today. The demand was ‘very good’, with books 4-5x oversubscribed in most of the deals. Heineken raised Eur500m in a no-grow 6-year at midswaps+70bp, Suez raised the same in a 10-year transaction at midswaps+80bp while American Honda plumped for a dual tranche 3.5-year floater and a 7-year fixed at midswaps+75bp. Scania’s was a short-dated floater, and sub-benchmark to start with, but they managed to raise Eur500m. Kerry’s deal (Irish foods group) was an inaugural, brave 10-year at midswaps+137bp for Eur750mn. Accor gave with one hand and took away with the other. They paid up for a tender of the 17s and 19s (around 30-35bp) while offering a concession for the new 8-year starting at 40bp. They settled at midswaps+155bp for Eur500mn (25bp premium). Initial premiums went out in the range of 17bp (Heineken) to 40bp (for Accor). They ended in the range of 7-20bp. More on this on Monday.

Monetary policy focus on more stimulus in Eurozone… No action from the ECB – but that is not news. The news was the potential for further accommodation (on growth and inflation concerns) and Draghi’s dovish stance which gave equities an additional  boost. There were hopes also that the Fed will be kind to the markets later this month. Basically everything we need to keep equities supported, corporate spreads tighter and a broad risk-on environment! It’s like the good old days. European equities gained by 2-3%, oil futures edged up a little, govvies were better bid and credit stable’ish amid still relatively only moderate secondary flows as primary markets dominated. Recent deals are performing well and this is seeing some confidence return to our market.

The US stock market rally faded after the close in Europe, so expect little to happen today as a follow through. As for the Thursday’s session, the iTraxx indices saw Main better offered, down at 71bp (-3bp) and X-Over at around 330bp (-8bp). Cash moves were more limited in a fairly unspectacular session and left in a narrow trading range, leaving the IG iBoxx index at B+141.5bp (+1.5bp) and the HY component at B+463bp (+3bp). The bund rally on a dovish ECB saw index yields lower and the first week’s marks of September seeing returns for corporate bonds on the up. Small mercies.

And finally, thank you… The iBoxx IG index is up at B+141.5bp and our straw poll asking our website readers where it would end at the end of the month from a starting level of B+138bp (end August) had them vote for a bullish stance. 55% expected spreads to be closer to B+130bp versus 45% who thought nearer B+150bp. After Draghi yesterday, the ball is in the Fed’s court. A thank you to all those who took time to vote.

Have a good weekend…