2nd August 2016

BoE up next

FTSE 100
6,694, -30
10,331, -7
S&P 500
2,170, -3
iTraxx Main
iTraxx X-Over Index
10 Yr Bund
-0.10%, +2bp
iBoxx Corp IG
B+126bp, -1.5bp 
iBoxx Corp HY Index
B+457bp, -4bp
10 Yr US T-Bond
1.50%, +5bp

Sit back and enjoy the sunshine…

Easing Rider?: BoE

Easing Rider: Bank of England

August ought to pass by with little excitement. And it’s just what we need. The BoE will likely instigate some easing measures this week, but for the rest, the markets are pointing to no imminent US rate hike amid a plethora of data indicating that the global recovery, or any semblance of it, is fading. Those GDP prints at the end of last week for Q2 (a shocking 1.2% in the US and just 0.3% in the Eurozone) tell us much.

A bird, a plane – not even superman, it looks like a helicopter (money). We’re in a mess. Declining/low global growth, weak inflation dynamics, full employment (or near as damn it in the US isn’t going to help), Germany and Spain hanging in there but France stalling from a GDP perspective (manufacturing slumping). Oil stockpiles are rising with prices declining again leaving the whole concoction pointing to a global macro outlook that is blowing cold again. It has flattered to deceive for the past eight years now. New data out on Monday showed that the UK economy faltered after the Brexit vote as manufacturing and business confidence took a major hit in July. Mind, it was the same in the Eurozone, but to not anywhere near the same extent.

We are back in that “bad news is good news” for corporate bond markets. Small wonder we have been having a fabulous year of it with returns in IG corporate credit up at 5.8%, as measured by the Markit iBoxx index. Many have an index beta greater than one and so will be exceeding that performance level. As long as there is no cliff event (and the current indicators suggest that there hadn’t ought to be) then slow, low growth dynamics keep the corporate bond market sweet. The risks against the IG corporate bond market are actually quite remote as far as we can ascertain at the moment and with the ECB involved, the next year or so should help us sustain some decent performance.

Nevertheless, if the economy splutters more, or we are just in medium to long-term rut (which we likely are), then we could expect the free cash flow boost from better financing conditions (garnered from low rates, yields) will not compensate for continued top-line revenue losses. This might eventually become quite important for the HY market, especially for lower rated borrowers (single-Bs and below). They are already usually walking a tightrope, but business models might not be robust enough for a long-term weak growth environment. This could finally have an impact on the default rate in Europe (currently easily less than 3%). Still, because we haven’t experienced these macro conditions ever before, it will be difficult to judge how the HY market (in particular) might eventually be impacted by another multi-year low growth dynamic.

ECB corporate bond purchases continue at good pace

ecb-buildingThe ECB announced their latest corporate bond sector haul, and at €13.2bn, they are keeping up a very good pace. That’s an average of €1.88bn after 7 weeks of activity, and €1.36bn last week (similar to the week before). We’re impressed. Spread markets have seen their tightening stall in the final few sessions of last week, but that will have been a temporary situation we have to believe. The BoE’s MPC meets this week (Thursday) with easing measures expected, but speculation has not been confined to just a 25bp (or more?) rate cut.

There has been some opinion that the MPC will give the go ahead for re-instigating a bond purchase programme which would include corporate bonds – and not just be confined to expanding the amount of Gilts which it already owns. We wrote last week that it would be an unnecessary move for them to do so, given that the sterling corporate bond market is too small and too illiquid, but does function well. That is, corporates have reasonably easy access to the market and funding costs are at their lowest ever levels. We’ll find out on Thursday.

Action at the long end in sterling


Vodafone: 33-year maturity offering

Vodafone finally printed the longer-dated issue that was muted last week. So, they followed up their 15-year deal with a 33-year maturity offering on Monday for a chunky £800m. There have been several other deals in the sterling market but we don’t believe that lower yields and tighter spreads are necessarily going to result in a load of issuance.

A few years ago we had a record £45bn of IG non-financial issuance and even one year with over £20bn issued in the HY market. Now though, it seems that much of the funding is opportunistic (we think in the case of Vodafone for example), with many corporate funding needs taken care of for the medium term. We’re lucky to get £20bn of IG issuance now. Aside from this deal, the only other offering came from Cellnex Telecom where this crossover rated name came with a sizeable €750m in long-7 year maturity debt, and around 20bp inside IPT.

In secondary, we tightened by 1.5bp on the index (some of it motivated by month-end index changes) to B+126bp, but the market was slightly better bid generally, even if there isn’t too much activity. We should be looking at a sub-B+120bp Markit iBoxx IG corporate level by the end of August. In the high yield market, focus was on the Cellnex deal, but we did close the session a little better. The Markit iBoxx index was at B+457bp (-4bp). That is the lowest spread on this index in 2016 (-68bp YTD) while the index yield at 4.10% is also the lowest this year so far.

Elsewhere, government bonds gave a little of their recent gains back which saw the 10-year Gilt yield up at 0.73% (+4.5bp) and the equivalent Bund at -0.10% (+2bp). The 10-year UST also gave up 5bp to yield 1.50%. Oil prices came under pressure with WTO seeing $40 per barrel and Brent trading just below $42 per barrel. Stocks were lower throughout the session amid little to be concerned about. The DAX was off less than 0.1%, the FTSE almost 0.5% and the CAC 0.7%.

That’s it. As a reminder, we are publishing just once a week though August. Have a good week, we will be back next Tuesday.

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.