8th September 2016

Capital preservation utmost

FTSE 100
6,847, +21
10,753, +66
S&P 500
2,186, unchanged
iTraxx Main
65.25bp, -1.5bp
iTraxx X-Over Index
306bp, -3bp
10 Yr Bund
-0.12%, -0.5bp
iBoxx Corp IG
B+119bp, unchanged 
iBoxx Corp HY Index
B+415bp, +2bp
10 Yr US T-Bond
1.53%, unchanged

Preservation and some appreciation…

No yield: Capital preservation the focus

It’s all about the money, money, money… we want to keep it. Some appreciation will do nicely for performance reasons, because there isn’t much yield to be had. There’s little or declining coupon to clip. And the spread? Well, that’s declining and is starting to matter less, too. One of the chief reasons spread mattered was for relative value trading. In a way, that lost its way several years ago, we just didn’t know it.
Well, we do now.
New issue pricing is more going to be off a yield value judging by September’s early skirmishes.

They weren’t exactly gushing out of the pipes in yesterday’s session. Just as well, because the negative yields and the longer maturity zero coupons were a couple of new situations that need to be properly digested. Long gone are the days when a zero coupon bond was issued at a deep discount implying a healthy yield to maturity. Now they are issued above par – and we can argue until the cows come home if they offer value from a relative perspective! The method in the madness of it all is about playing the game which the ECB has constructed, not to worry about the downside (that will come from growth, higher inflation and higher rates which are all still elusive) and get the money parked in assets which are not risk free – but behave like they ought to be.

Uncharted waters? You bet. Money still keeps flowing onto corporate bond funds. It’s the fixed income asset with the “most-est”, given those juicy returns this year (6.3% YTD in IG). It’s for another day that we fret about the exit.

Higher beta issuers a welcome sight


€1.6bn was issued 15-20bp inside IPT for Thermo Fisher Scientific

Glencore aside, Monday was low beta day. Tuesday saw a welcome reprieve and a couple of triple-B rated borrowers offering a little more yield. Ferrovial Emisiones sold €500m at midswaps+52bp (15bp or so inside IPT) while a dual tranche deal from Thermo Fisher Scientific saw €1.6bn issued 15-20bp inside IPT.

WPP became the latest corporate to issue in sterling, opting for a 30-year for £400m. Elsewhere in the plain vanilla market, Bank of Nova Scotia printed in sterling.
The running total for the month to date, in non-financial supply is now €9.35bn, while for the year-to-date we are up past €190bn, and we will be through the €200bn mark by the time the month is out.

Our tuppence worth on the ECB

We think that, given the relative short time that the current measures have been in place, the ECB will have little choice but to wait before they impose any further easing policy. We think the deposit rate therefore stays fixed at -0.4% and even if they did move on this, we do not believe the banks would suddenly change tack and start to throw money at the economy through greater lending. Better to lose (or pay) 40bp – or a little more, than potentially write off billions should macro take a turn for the worse. Further QE, in terms of raising the size of current programmes, will also be resisted but we could expect Draghi to suggest that they will explore “other avenues”. Buying bank bonds might be on the agenda – but for another meeting. Not this one.

Our view is: steady as she goes, let the current measures play out, and let the dissenting voices on the council see that more probably needs to be done. The most we can expect is that the current QE will be expanded beyond March of next year. Policy at a more structural political level needs to change.

That means lower bond yields for longer. More cash will look for a home in the corporate bond market. Corporate bond spreads will tighten, yields will fall and the zero coupon bond, issued above par with negative yields will become common place. The pain in the unwind will come, but it could be a long way off, and we don’t worry about this situation right now. The corporate bond market will remain in the ascendancy.

DAX in the black!


Yes, I’m back in black: the DAX

The DAX index made it into the black for the first time this year. Having been down 18% twice this year, the index has clawed back losses and is 10 points to the better versus the close on Dec 31, 2015. The session otherwise had little to write home about in equities or government bonds. Most markets were a small up or a small down with few willing to take on a major position pre-ECB.

The lacklustre session in equities and govies was replicated in the corporate bond market with spreads completely unchanged and the iBoxx index stuck at B+119bp, although the better bid for the underlying government bond saw the index yield drop to a new record low of 0.79%. We are targeting 0.70% by the end of this year (maybe before). High yield spreads edged wider, but yields lower and returns higher to 7.5! And we know most HY investors are total return focussed.

That’s it, back tomorrow. 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.