10th September 2015

Buy the dip

MARKET CLOSE:
FTSE 100
6,229, +83
DAX
10,303, +32
S&P 500
1,942, -27
iTraxx Main
69bp, -2bp
iTraxx X-Over Index
319bp, -11bp
10 Yr Bund
0.70%
iBoxx Corp IG
B+142.4bp, -0.5bp 
iBoxx Corp HY Index
B+462bp, -5bp
10 Yr US T-Bond
2.19%

Fickle markets on the rise… It was only a few days ago that the prospect of a Fed rate rise, allied with the subsequent potential for further market volatility from China event risk, had all of us on tenterhooks. Pfff, there’s been nothing of the sort. Well, it depends how the market chooses to look at it. Not quite on fire, but if we hold this bullish mood, a US rate rise might offer only a day or two of jitters before we are off and running to end the month/quarter on a high. It’s certainly looking like that is what might transpire. Sentiment is boosted by continued hopes of Chinese intervention to help prop up its economy and stock market, while action from individual corporates to address their problems (Glencore, for example) and some better than expected economic data (Germany) has fed into the current upbeat mood. Small things matter. The bottom line is that the global economy is under pressure – it might be going down, but it won’t go without a fight, with central banks looking to use whatever fiscal and monetary tools they have left in their armoury to keep it all ticking over. The salutary lesson is to buy the dip. Admittedly, it’s not that easy as far as the euro-denominated corporate bond markets are concerned, given that secondary market liquidity is so poor even when spreads go (are marked) wider. But should pockets of liquidity emerge, then we think it is a good opportunity to buy into any perceived weakness.

German drive-through in primary… Daimler and BMW were noticeable for their endeavours in primary, while German investment group JAB Holdings (Baa1/BBB+) and packaging group DS Smith (low triple-B) also launched non-financial transactions. They all combined to keep the printing machines well-oiled. The deal flow keeps coming and seems plenty at the moment to satiate investors’ demand for corporate paper. The Daimler 2-year floater was nevertheless completely uninteresting, as was BMW’s 3-year one, although the latter also funded in 6-year, for Eur1bn at midswaps+65bp (-10bp versus IPT). JAB and DS Smith plumped for 7-year deals at midswaps+160bp and 172bp respectively, with the latter 11bp tighter into the close. DS’s reoffer was around 8bp tighter than IPT and the big upside suggests that higher beta deals are still much sought after. Oh, and the market loves a new name. The BMW deal edged out a basis point on the break. All three fixed offerings today garnered books of over Eur2bn each. Triple-B plus rated Technip is roadshowing next week.

UK misses everywhere, little chance of a rate-hike… Manufacturing and industrial production in the UK both missed for July, while the trade deficit widened. The Bank of England isn’t going to risk it all by raising rates. We’re not alone in thinking that, and the FTSE initially rose by 2% on those numbers, leading the way for all European bourses. There was some pullback from the highs on the strong job-openings report in the US. in early trading, two-year US treasuries went up to 0.75% (+2bp) and the 10-year by 5bp to 2.23%, while the 10-year Bund edged up to 0.70%. Into the US close, we were off those higher yields in the US and equities down 1.4% on renewed growth and rate jitters. Ho hum. In Europe, credit markets took their cue from the equity markets’ mini-bull run and moved a little better, with the iTraxx indices lower (better offered again) and cash spreads tighter, and higher beta issues leading the charge. The more aggressive rise in underlying yields in the US also highlights why euro-denomoinated credit is better placed to perform versus dollar-denominated corporate bonds. The iBoxx cash corporate index managed to close at 142.5bp (-0.5bp)and the HY index at B+462bp (-5bp).

With that weaker close in the US overnight, with the S&P and Dow both down around 1.4%, look for a weaker start to the session today… happy hunting.

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.