2nd March 2016

The badder the better

MARKET CLOSE:
FTSE 100
6,153, +31
DAX
9,717, +222
S&P 500
1,978, +46
iTraxx Main
95bp, -4bp
iTraxx X-Over Index
389bp, -20bp
10 Yr Bund
0.14%, +3bp
iBoxx Corp IG
B+180.7bp, -4bp 
iBoxx Corp HY Index
B+625bp, -9bp
10 Yr US T-Bond
1.83%, +10bp

No lines in the sand… A new month and the same picture on the macro front. This time, weak PMIs across the board. On Monday it was from the US Midwest. Yesterday we kicked off with manufacturing contracting in China (again), followed by data showing a major slowdown in the eurozone/UK and all leading into (reduced) contraction again in the US as a whole. Basically, weak demand and a difficult macro picture (except in the US?) are having their day and the impact will be felt for a good while yet. There are bound to be some revisions coming up on economic growth – everywhere. Equities might have reacted positively, but that was more about the growing confidence in next week’s ECB meeting delivering stimulus after yet another poor set of data. So we are going to be junked up on more of the ECB’s medicine rather than from any hope that we’ve turned a corner and growth is back on a sustainable footing. It will be all good for a couple of weeks. Feed into it, or de-risk? Equities and just about all other risk assets are counting on it, but we believe bond markets will be the medium-term outperformers, offering predictability, stability and a decent return/income, with hopefully little of the volatility associated with weak/poor headline macro news flow. Click here for updated charts showing the performance of spread markets for the first two months of 2016. Once the ECB is done and dusted, what then? Poor data and expectations of even more stimulus? Or they don’t deliver and – as usual – leave us chomping at the bit for more? Either way, we believe that the next round of stimulus will likely not be the end of it. For now, European equities were up 1% or more across the board, a barrel of oil as measured by the price of Brent is amazingly almost flat YTD after being as much as 35% lower in January, while the iTraxx indices are back through 100/400bp for Main/X-Over. That’s as good a way as any to start March, but iTraxx indices back down at these levels could also be a good entry point for a short-risk trade (123bp and almost 500bp for Main and X-Over, respectively, were the levels a couple of weeks ago).

Strong start for risk assets… The DAX moved 222 points higher in the session, and is up over 350 points from the previous day’s intraday low, which closed 18 points lower. The safest government bonds gave a little back and the bellwether 10-year Bund yield rose to 0.14% (+3bp), while peripherals managed to hold their ground. In credit, our general market risk proxies – the iTraxx indices – all moved lower, and cash was similarly better marked. The focus was again on primary, and we had a three-tranche deal from Daimler which raised €3.5bn and garnered demand/combined books of over €8bn in the process. Pricing was 10-15bp tighter than initial guidance across the tranches. In addition, there’s confidence in the primary bond market as evidenced by the 5-10bp of tightening in Monday’s deals from IBM and BP, while almost all other new issues in IG corporates this year are trading better versus reoffer. Dutch/French REIT Unibail added €500m, getting us off to a not too shabby start for March. The deal of the day in our view though was the €750m issue from the double-B rated ThyssenKrupp. Even though the issuer was downgraded just a week ago, there was little risk that this deal would not get away. A darling of the German retail-bid and (especially) domestic and international institutional IG buyers (with much room for HY risk), the industrial giant clipped 5-year funding at a cost of under 3%. It was only the second meaty high-yield deal of the year following on from January’s Telecom Italia transaction. As such, it is not a harbinger of things to come in this rather parched sub-investment grade market, which has seen just €2,5bn of issuance in 2016.

Super Tuesday for corporate bonds too… The Markit iBoxx IG corporate bond index tightened by 4bp to B+180.7bp, though some of that was due to month-end index changes. CoCos and corporate hybrids managed a good bid and yields fell by 25bp to 8.02% for the former (Markit iBoxx index). Higher beta’s outperformance carried through to the HY market which saw the index spread decline to B+625bp (-9bp). iTraxx Main was 4bp lower at 95bp and X-Over at 389bp (-20bp), the latter tighter by 100bp in just a couple of weeks or so. The US was closing strongly emboldened by better orders growth and improved inventories. The S&P was up almost 2.5% into the close and US Treasuries fell, the yield rising to 1.83% on the 10-year (+10bp).

Here’s to a wonderful Wednesday, 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.