19th February 2016

You can always get what you want

MARKET CLOSE:
FTSE 100
5,972, -58
DAX
9,464, +86
S&P 500
1,918, -9
iTraxx Main
111bp, +3bp
iTraxx X-Over Index
442bp, +8bp
10 Yr Bund
0.22%, -5bp
iBoxx Corp IG
B+186bp, -2bp 
iBoxx Corp HY Index
B+640bp, -10bp
10 Yr US T-Bond
1.74%, -8bp

If it feels like it, it must be… It feels like it has been a good week. Stocks plumbed the depths, but have rallied by 1-3% almost every day and oil prices have moved higher – double-digit percentage points on one occasion. The DAX has put on around 700 points from last Friday’s lows, for example, while oil per barrel is worth $30-34 depending on the measure (WTI/Brent). These have been the headline grabbers. We wouldn’t say it has necessarily been full “risk-on” given that eurozone government bonds have stayed stable, although we concede that US Treasuries have faltered (yields popped higher). In the eurozone, we still have to contend with the likelihood of additional QE come March. For corporate bonds, the now high-beta corporate bond markets bellwether – the 6% Deutsche CoCo – has bounced 11 points ($81 cash price), which is actually a decent recovery; the Markit iBoxx HY index (broad measure for that market) has tightened by 20bp, but the IG index has trudged lower by just 4bp in the week. The iTraxx indices have returned from the brink too, but that should come as no surprise given how stocks have performed. However, the Fed’s January meeting minutes warned of downside risks to US growth, while just 3 months after publishing their 2016 outlook, the OECD was slashing its growth expectations for the year. Global growth is now expected to be around 3.0% (-0.3% versus previous estimates) and the eurozone at 1.4% (-0.4%), with Italy and Germany seeing the biggest revisions of -0.5% and -0.4% respectively. The US drops to 2.0% (from 2.5%). Of course, the organisation can – and usually does – get it wrong, but the big picture is clear: expect lower growth and for macro to disappoint, more QE, lower central bank rates forever and more (and deeper) negative deposit rates. That means low yields and returns, corporate cost-cutting, pressure on corporate earnings, weaker investment/capex levels and increased potential for greater event risk. We’re caught in a trap: Rearrange “It’s a, vicious, fight, and, on, hands, our, a, have, circle, we” – and one gets the picture.

ECB ready for action… And we’re all cock-a-hoop. Never mind the pros and cons – mainly cons – the market wants lower deposit rates and more bond buying. The market will get what it wants. The release of the ECB minutes served to confirm the central bank’s appetite for further action, and this was reflected in the rally in peripheral yields. Only a week ago, it was all hands to the pump in the flight-to-quality trade – and never mind potential ECB action – but now it’s a case of pile ’em high ’cause they’re cheap; the ECB shopping trolley is about to do the rounds. At over 4% last week, the yield on the Portuguese 10-year dropped by almost 25bp at one stage on Thursday only to end just 7bp lower to yield 3.37%, while BTPs (1.55%) and Bonos (1.69%) were 3-5bp lower in yield. Nothing has fundamentally changed to suggest Portuguese yields should be almost 80bp lower in the week. How fickle we are sometimes. Bund yields also declined with the 10-year at 0.22% (-5bp) while oil prices were choppy and finally down slightly on the day into the close.

Primary boosted by drugs groups… Pharmaceuticals dominated the new issue market as we finally had some non-financial supply following a 2-day lull. The deals came in the form of a dual-trancher from of rare offerings from Amgen and Roche. The former took €2bn in 6-year and 10-year funding, with both tranches around 15bp tighter than the initial price talk. Roche’s €650m in 7-year funding took total YTD non-financial issuance to just over €19bn. Anglo American announced a $1.3bn buyback of short-dated debt as part of its ongoing debt management/asset disposal/getting back to health operations. The senior bank deals launched this week are all performing, and up to 8bp tighter versus reoffer (BNP). In secondary, there are signs that some profit-takers are emerging in the Glencore’s of the world and some of the CoCos, but generally the picture remain the same – it’s considerably more difficult to buy the (still) beaten up names. The Markit iBoxx index for IG corporates closed a couple of basis points better at B+186bp, while despite evidence of profit taking, the CoCo index yield fell to 7.78% (-32bp, -198bp off the highs of last week!). Elephant trade? In HY, the index was 10bp lower at B+640bp, reflecting the better tone in risk markets overall. Flows remain subdued. The iTraxx indices gave up earlier gains to close wider versus the previous closes, with Main up at 111bp and X-Over at 442bp. It wasn’t too long ago that we talked about 100bp/400bp for Main/X-Over…

That’s it from me this week, have good day and weekend. Back Monday.

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.