18th May 2016

Back in business

MARKET CLOSE:
FTSE 100
6,168, +16
DAX
9,890, -63
S&P 500
2,047, -19
iTraxx Main
76bp, -2bp
iTraxx X-Over Index
323bp, -4bp
10 Yr Bund
0.13%%, -1bp
iBoxx Corp IG
B+148bp, unch 
iBoxx Corp HY Index
B+503.5bp, -3bp
10 Yr US T-Bond
1.76%, unch

Taking it easy before we erupt…

house-prices

UK house prices are on the up

Not quite a bang, but nor a whimper. It felt like a measured assuredness as we kicked off the week proper with a bunch of new issues to get us into the groove after a fairly sedate few days. Today promises much more. It felt like a lot of issuance as every category of the credit universe was populated. Senior debt, subordinated debt, banks, insurers, non-financial IG corporates and a high yield deal. The news flow was mixed to say the least, with Italy busy downgrading its GDP forecast for 2016, house prices were up almost double digit figures in the UK in the year to March, UK CPI undershot in April YoY and sterling came under some pressure as a result. The Brexit vote, according to the latest polls, is leaning towards the Remain campaign.

Equities rose sharply at the open only to give the gains all back and the only explanation we can find for the initial big swing into the red was oil. It does seem as though there is a strong correlation between stocks and the price of a barrel of the black stuff, the latter being a whisker away from $50 per barrel before dropping back to around the $49 per barrel level.

The primary market is the focus for the credit markets – almost totally for investors. Deals in IG non-financials came from Finnish electricity grid operator Caruna Networks, Paccar, Nasdaq and Leaseplan while Swiss-based chocolate group Barry Callebaut batted for the high yield market. Barry-Callebaut-Chocolate-PorscheIn financials, we had senior offerings from SG and Citigroup – who took €1bn each, while the T2 sector saw issues from Argenta Spaarbank (€500m) and Zurich Insurance (€750m). The total IG non-financial supply amounted to €2.1bn and HY €450m, leaving the month to date issuance for the former at €29bn. Coca-Cola is readying a multi-tranche deal, having held investor calls during the day.

Data flatters to deceive, good for corporate bond market

The macro data continues to take a step forward followed by a couple back. We’re without doubt locked into a low growth regime and the high absolute debt burdens everywhere have barely shifted. Servicing that debt has been made less onerous by the low rate regime leaving the world to continue to tick over. There is no recovery. Earnings are beating lowered expectations as corporates squeeze out costs (and there isn’t much more they can do), while top line growth remains elusive in any meaningful way. Investment and capex are subdued as even low-cost funding fail to elicit any adventure. That is, corporate balance sheets remain in defence mode. Much of the pre-crisis “higher cost” funding is no longer showing up on the balance sheet given the longevity of the crisis and the impact on funding/refinancing levels (low rates/yields/spreads), that further positive contributions to earnings from low debt servicing costs are soon going to be less helpful (they likely already are).

So, without any meaningful uptick in global growth and with it opportunity for investment and organic growth, equities look like they have had their day – for the moment. All that is good for corporate bonds. Defensive corporate balance sheets and low cost funding for an extended period against a backdrop of low yields for government bonds and/or deposits make for corporate bonds offering an incremental “safe” income, while yielding more than government bonds/bank deposits for buy and hold investors.

Good start, not so good middle, weak ending

After a perky open, it quickly went downhill quickly and ended with bit of a thud after US data suggested manufacturing activity and inflation, in April, were making a comeback. Rate jitters set in – again, and eventually trumped the move in oil prices as the determining factor as to market direction. The DAX played out by displaying the full repertoire of emotion. Up at 10,080 (+0.7%) at the session high versus an opening level of 10,016, the index visited a low of 9,847 (-1.6%) before closing off the lows at 9,890 (-0.6%). We certainly don’t get that kind of intra-day volatility in the cash corporate bond market, where things move much more slowly!

Into the jitters, government bonds recovered a little with Bund yields left at 0.13% (-1bp). US stocks had a bad time of it, the S&P down around 1% and therefore ensuring we have a nervous start today. Credit closed unchanged yesterday in a lacklustre session for secondaries for IG with HY a tad better bid, for choice. The excitement has long been sucked out of the secondary debt market.

Have a good day.

Suki Mann

A 25-year veteran of the European corporate bond markets and in his role as Credit Strategist, Dr Mann has been ranked number one in the Euromoney Investor Survey eight times in ten years. Previously with Societe Generale and UBS, he now shares views of events in the corporate bond market exclusively here on Credit Market Daily.