21st September 2015

Bon Courage

MARKET CLOSE:
FTSE 100
6,104, -83
DAX
9,916, -313
S&P 500
1,958, -32
iTraxx Main
71bp, +1.5bp
iTraxx X-Over Index
322bp, +4bp
10 Yr Bund
0.66%
iBoxx Corp IG
B+149.8bp, +1bp 
iBoxx Corp HY Index
B+480.5bp, +7.5bp
10 Yr US T-Bond
2.13%

Certainty until 2016… Yellen said it, no? To paraphrase, as long as macroeconomics remain uncertain, as long we see little upside to inflation (and I suppose we can extrapolate that to the slow pace in US wage growth), the Fed isn’t going to move, even if the unemployment rate continues to fall. Unless, of course, she speaks with forked tongue. At this point we are unlikely to be wrong-footed come the October meeting, but the December one might need a little more thought. So it’s business as usual for a while. The shutters go up and we look forward to a decent run-in for credit into month/quarter-end, to hopefully recover some of the hitherto lost performance. Year and month to date, IG returns are -1.3% and +0.015% respectively. We look for some improvement on those numbers over the next week or so where the rally in the underlying will help all offset a little of the spread weakness if we get a deluge of supply, which might act as a brake on any material tightening in spreads. And it could be worse. After all, Germany’s DAX equity index was up 25% in April versus where it started the year. Oh, now it is close to being flat and was even negative YTD in that late August drubbing on Chinese devaluation fears.

Markets react as expected… Post-Fed, we saw a weaker dollar/stronger euro leading to European stocks pushing aggressively lower (top-line growth and export worries). US stocks were lower on those global growth concerns cited by the Fed. This could reverse quickly given the fickle nature of stock and FX markets, which more often than not play to the tune of the headlines. The Bund got a good bid behind it, which should be more structural, and rallied quite hard (10-year yield: -13bp); expectations and pressure are now growing on Draghi/ECB to supply additional stimulus. Index roll dynamics kept the iTraxx indices from following stocks like-for-like and they rose only moderately (better offered/weaker), while the cash corporate bond market was wider too (after a better open), but there was no disaster in it. After all, corporate bonds somewhere to park that cash – offering better yield from what has become something of a safe-haven-like asset class.

Fill your boots, but not with reckless abandon… We said in several commentaries last week that this was a good opportunity to add corporate bond risk. We still think so. Admittedly, when stocks are down by so much, when the headlines are difficult, when others are running for cover, then it becomes a tough ask. We’re always going to be wary of those weaknesses elsewhere and the contagion impact they might have on spread markets (lately added to by the huge supply). Supply dynamics being what they are, they are always a moving target. For sure, little or no money has left our market, we continue to have much sidelined cash and investors do want to add. The first few deals which come this week will be cheap – but they will need to perform. Any mushrooming confidence should see a better technical edge to the cash market as we ride out the third quarter and the run-in to year-end. So we would still stick with a higher-beta bias to the positioning, skewed towards lower IG paper, corporate hybrids, CoCos, double-B rated HY risk and solid single-Bs, and a bias in IG towards wearing some duration risk.

Where do we stand now?… Spreads as measured by the iBoxx IG index are at B+149.8bp, some 9.8bp wider than where we started the month. These are easily the wides of the year, and we last saw these levels just about two years ago. Since then the ECB has been in action, and yet we’ve given up 60bp from the tights we enjoyed in Q1/2015. In HY the index has widened by 12bp, and now also resides at the wides of the year at B+480.5bp and some 8bp wider in last Friday’s session. The day started well, but given how equities gave up, credit followed suit. Contagion has something to do with it. There were no new issues, as one would expect on Friday, and it will be a brave borrower that chances its arm on Monday – or a good syndicate desk that convinces one to bring a super cheap deal. More likely, the week will see us open in pensive mood, and we should expect a slow start. Still, it has been a heavy month and a heavy year on the supply front. Dialogic data has IG non-financial issuance at Eur27bn MTD and Eur213bn YTD. These are big numbers, but not record ones.

Late on Friday, France was downgraded to Aa2/stable by Moody’s, Syriza won the election in Greece – but it doesn’t matter as austerity and adherence to the eurozone bailout was always going to be implemented whichever party succeeded. There is a flurry of US data later this week ending with that US GDP number on Friday.

As Sergeant Esterhaus used to tell the guys after each morning roll call in Hill Street Blues, “Let’s be careful out there.”

Have a good week.

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.