14th January 2016

Busted buster

FTSE 100
5,961, +32
9.961, -24
S&P 500
1,890, -48
iTraxx Main
87bp, unch
iTraxx X-Over Index
350bp, unch
10 Yr Bund
iBoxx Corp IG
B+165bp, +1.5bp 
iBoxx Corp HY Index
B+560bp, +6bp
10 Yr US T-Bond

Relief uptick fades in dramatic fashion… A set of good Chinese trade figures for December, and with it an all-round sigh of relief. It set off a mini chain reaction that saw oil prices bounce, equities rise and credit tighten. Unfortunately, it didn’t last. That there was nothing overly aggressive in the moves to start with, we think investors are displaying much caution because another day will almost certainly bring a reason to reverse any gains. Anyway, for a while it stopped what was beginning to look like a precipitous fall in asset prices that one might think comes on the back of being in the slipstream of some sort of deflationary vortex. Whether we are in the throes of one is still up in the air, and we won’t really know for a while. It’s why we will likely continue to play out to the ebb and flow of the daily economic data and try to grind out some performance. That’s the hard part, because most asset managers are naturally long their market. We all rise and fall together, except that positioning can help with some sort of relative outperformance. Credit might have been slightly better bid today at the open, but we need sustainability in the improvement in spreads, otherwise it will not compensate for any weakness in the underlying – if we get it. That is, the 10-year Bund is yielding 53bp (the old one), and as long as it stays around these levels returns will hold steady. We believe government bond yields will fall though, and hopefully not wreak too much havoc with performance. And everyone is watching their portfolio – every day, at the moment. Overall, while we are extremely concerned with the state of the global economy and the likely path it will take (more weakness), we still firmly believe the corporate bond market ought to curry much favour. Double-B risk and higher will reward the buy-and-hold investor (most of the market now!), but it will also mean several long stretches (years?) of low or negative performance from a returns perspective. Income will be generated and principal pretty much guaranteed given that we don’t think ratings transmission risks over a 5-year period (index duration) will see any meaningful pick-up in defaults for this category of rated risk.

ABInBev steals Telecom Italia’s headlines… Despite the fickle nature of the market, primary has continued to pump out paper. Most deals though are not performing that well, regardless of the new issue premiums being offered or their defensive low-beta nature (covered, senior banks). The Daimler deals from the opening week are also a little under water. Secondary levels are also backing up on those new issues, leaving a no-win situation. It would seem that secondary traders are afraid to take on much risk in case a new deal materialises (the next day?) and they lose 5-15bp on the follow. Admittedly, there has been a lot of issuance, especially in the covered space, and over 90% of the deals are wider versus re-offer. Despite all that, investors continue to use the primary market as their preferred entry point. And if there are nerves, someone didn’t tell the investors, who put in for a record $110bn worth of orders for ABInBev’s mega 8-tranche $40bn deal! That’s the second largest fund raising in one go in history, following on from Verizon’s $49bn three years ago as it bought out Vodafone from its US joint venture. ABInBev is busy funding its SABMiller purchase. Here, we got a high yield deal, courtesy of Telecom Italia (Ba1/BB+). It is the first such transaction of 2016, and we now just need a corporate hybrid to complete the line-up (senior, subordinated, IG, CoCo, HY and hybrid). Admittedly, TI is not your traditional high-yield company, given that it is a blue chip national champion with a core, broad (IG) investor base always interested in wanting to hold its paper. The borrower took Eur750m in 8-year funding at midswaps+305bp on a book of around Eur2bn. Mondelez was the other non-financial deal on Wednesday, with the US borrower lifting Eur700m at midswaps+123bp in a 7-year maturity. Pohjola represented the senior banks with a long 5-year deal.

As night follows day… It should come as no surprise that we failed to hold on to the earlier gains. Burgeoning crude inventories in the US saw to it that earlier 2%+ session gains in oil prices were skittled away. Stocks gave ground as well, with the DAX losing a 1% rise to close 0.4% lower at 9,937. All other indices fell too, as did the S&P – in spectacular fashion, not helped by a report showing that slack in the US labour market continued to fall and activity rose above an 8-year average high. The market naturally read into it that higher rates are coming, and sooner rather than later. There was a flattening in the Treasury curve as the 10-year yield dropped 4bp to 2.06%. Work that one out. In the session, credit spreads weakened again, giving up any earlier hopes of a (sustainable or otherwise) tightening, with the Markit iBoxx IG corporate bond index up at B+165bp (+10bp YTD) and the HY index at B+560bp (+6bp). The yield on the latter is now up at 5.58% (+27bp ytd).

We closed out with the S&P 500 down 2.5% with the Nasdaq off by almost 3.5% and were left with a fairly downbeat interpretation/outlook of the US economy from the Fed Beige Book report. Brent closed at $30.29 and WTI at $30.77 and it seems like no great call that we will sit firmly under $30 per barrel in today’s session. We will open lower in stocks by some margin and we will test the lows already seen last week. Credit spreads will be wider (iTraxx Main will test 90bp), activity will be light and the primary market ought to be very quiet in what has been a fairly tumultuous opening two weeks of the New Year.

That’s it from me. Stay calm. 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.