Category Archives for "Fixed Income Market"

17th March 2016

Other beers refresh the parts

MARKET CLOSE:
FTSE 100
6,175, +36
DAX
9,983, +50
S&P 500
2,027, +-11
iTraxx Main
77bp, +1bp
iTraxx X-Over Index
327bp, +1bp
10 Yr Bund
0.31%, -1bp
iBoxx Corp IG
B+155.2bp, +1.5bp 
iBoxx Corp HY Index
B+541.5bp, +7bp
10 Yr US T-Bond
1.91%, -6bp

Don’t be impatient, Rome wasn’t built in a day… Less than a week later, the euphoria that greeted the ECB’s additional easing measures has gone. It’s almost as if we have had a risk rally cliff event, stopped dead in its tracks. Don’t worry, we believe it is a healthy sign that markets prone to exaggeration – up or down – are now acting out in a measured way. Admittedly, a few concerns are lurking. For example, 6 weeks ago Deutsche Bank was on the ropes while on Monday it took €1.5bn in 3-year funding. Is Deutsche Bank – or the banking sector, for that matter – fixed, or are we merely correcting past ills with sticking plaster? And then we had Transurban Queensland pull a deal in a completely unexpected move into a so-called bullish market. Oil was on its knees a month or so ago too, but we’ve seen some good price recovery and now wonder whether the $40 per barrel level is sustainable. For corporate bond markets, the trend will be for spreads to continue to move tighter as the market becomes more and more technical, while stock markets (and commodities, oil in particular), will play out to the prevailing headlines. We might need a renewed push for the corporate bond market to tighten more aggressively after the huge spread recovery witnessed since last Thursday, and that will possibly not emerge until details of the corporate bond buying programme are announced. It could be a “long wait” well into the second-quarter before that happens, but few will bet against the market exhibiting much or even any weakness ahead of it. Risk positions will remain intact. Reducing anything now will only store up disappointment later because the need/scramble to get risk on board (mainly through primary) isn’t going to leave us. Secondary market liquidity will not be your friend, and being underinvested will be painful.

Just two corporate borrowers, but boy, oh boy!… Incredibly, we saw just two issuers from the corporate sector – but close on €15bn of issuance. ABInBev busted all records with a multi-tranche €13.25bn effort on demand exceeding €30bn – the largest offering in a single take in the history of the corporate bond market in Europe. Draghi’s action last week might have had something to do with it, but before we get carried away and assign all the credit to the ECB’s work, the debt-raising was needed to fund the group’s $100bn+ SAB Miller acquisition. The ECB’s announcement was super timely because it assured demand for this deal while the pricing would otherwise have much higher. That’s because investors are in “grabfest mode” and looking for guaranteed performance (it is never guaranteed). ABInBev’s treasury desk will be rubbing its hands with glee at its fortune. Mind, so will the banks with the fees the deal brings. It was a barren period in January and February on the issuance and fees front, but March has turned out to be the pot of gold at the end of the rainbow. The other deal worth a mention was the €1bn T2 raising by Commerzbank, the second such deal of the week. For non-financials, that’s €21bn of issuance this week alone already, €32bn for March so far and around €71bn YTD (all Dealogic data). That’s fantastic, but we are still well down on the record quarter of Q1 2009, when €120bn was issued! This is the tenth best month for issuance in history – and we still have a week and a half of business to go. The best month in European corporate bond market history for non-financial corporate bond supply was January 2009, when €49bn was printed, and the current run rate suggests we could beat it (see chart).

10th heaviest month for issuance in history – so far

FOMC good for risk assets… We put down the markets more apprehensive performance in the session down to nerves ahead of the FOMC communique. In the end, the Fed left it all unchanged and recognised/flagged global risks impacting their rate decision – with just two hike likely in 2016. Before it, in equities, the DAX and FTSE managed gains of +0.5% while most other bourses were flat to a small negative. US stocks received a limited boost on the Fed decision. Oil prices were much higher with Brent up 4% and at just over $40 per barrel again. Government bonds did little, with yields just edging down in Europe by a basis point or so, although the US 10-year yield fell 6bp t0 1.91% after the FOMC newsflow. In credit, we edged wider with low beta sectors holding much better than the higher beta CoCo and corporate hybrid areas. The Markit iBoxx IG corporate bond index was up at B+155.2bp (+1.5bp), and back to being wider YTD – just. The heavy supply in the last couple of session seems to be have had an impact on secondary valuations.

It’s all good, have a good session.

Suki, Alan and Caroline

16th March 2016

Believe it, it’s going to happen

MARKET CLOSE:
FTSE 100
6,140, -35
DAX
9,933, -56
S&P 500
2,016, -4
iTraxx Main
76bp, +4bp
iTraxx X-Over Index
328bp, +15bp
10 Yr Bund
0.31%, +4bp
iBoxx Corp IG
B+153.5bp, +0.5bp 
iBoxx Corp HY Index
B+535bp, +5bp
10 Yr US T-Bond
1.97%, +1bp

Time to revisit the tights… We went out with expectations that corporate bond spreads in investment-grade credit would tighten 24bp in 2016 to B+130bp and return 1.5-2%. But with the ECB in play, we are looking for spreads to be closer to B+100bp (Markit iBoxx index) from the B+153.5bp as of today. We are on course for 4%+ returns if spreads hit that 100bp level and underlying yields hold steady or go lower. The iBoxx index achieved a record low spread of B+95bp exactly a year ago, as well as a record low yield of 1.02%. Spreads will continue to tighten while the ECB bond buying programme is ongoing, and allied with continued weak economic data will keep the underlying (government bonds) anchored. Currently at B+153.5bp/1.50%, the old record low is under threat on both counts. And that’s a fund manager’s problem – or rather it will be, in 2017. It’s also a problem for pensioners, as well as for anyone else who is dependent on savings income. And it will become more of an issue in time as bubbles are maintained or created in other asset classes as liquidity chases yield – that is, riskier assets. Back to credit, and while it looks good for IG, the “push-down” effect will also benefit the HY market. S&P, we mentioned yesterday, suggested a below average default rate for 2016 (we think beyond), and we are of the view that the market for borrowers will reopen in due course. More supply will breathe confidence into the market and beget tighter spreads. It’s difficult to judge the spread outcome for high yield at this juncture, but the narrowing trajectory could see us materially tighter from here. Poorer secondary market liquidity especially ought to see a disproportionate movement tighter, and the current B+535bp could see the Markit iBoxx index closer to B+400bp and returns easily north of 5% by the end of the year. Single-name event risk will be the major hurdle – as always – given we don’t foresee a systemic issue derailing the high yield market.

Cash and synthetics: What do they tell us?… We commented previously that the cash market will now become very technical and that the synthetic (CDS) market might offer a truer reflection of the risks inherent in credit. That wasn’t always the case. We expect that CDS/iTraxx indices will generally continue to play out to the tune of macro news flow, headline and sectoral event risk and equity market volatility. Their liquidity will also offer a better opportunity to play directional trades for (short) periods, should one want to. We would therefore expect divergence between cash and synthetics, with the former outperforming and generating the expected cash/CDS basis impact. Unfortunately, relative value-positive basis trades as a pairing (CDS-cash) are difficult to put on, as few will want to short cash!

Primary order of the day… A plethora of issuance met us today. Lots of deals sized between €500m and €750m, and something in it for everyone. For the periphery we had Brisa in a sub-benchmark €300m, 7-year offering. FCA Cap offered up €500m in 4.5-year funding. Scentre Group also came with a 7-year for €500m, while RLEX (formerly known as Reed Elsevier) clipped €750m in a 10-year transaction. Thyssenkrupp was there for the HY market with a €100m tap of its 2.625% 2021 issue. All the deals were oversubscribed by 3-5x and final pricing tightened by 10-15bp versus the initial price talk. In financials there were a couple of senior deals from RBS and Deutsche Bank, while Santander lifted €1.5bn in a 10-year T2 offering. Finally, and in a surprising development, Transurban Queensland pulled their €500m, 8-year potential deal, citing volatile market conditions. Confused with that explanation? We were. We would think that there was some pushback by investors, reducing the potential for tightening versus that initial price talk, and the borrower deciding not to pay up having probably been “promised” a much better level; it’s not the best name in the world to get excited about.

Tranquility confined to corporate bond market… The stock markets finally ran out of steam and gave a little of the previous sessions’ stellar gains as they ended the session 0.6-1% lower. Oil prices continued to fall too, with another 2%+ drop leaving Brent at around €38.5 per barrel. Govies gave some back too with safe-haven bund yields higher – the 10 year at 0.31% (+4bp), while peripheral risk was also a little weaker perhaps on a bit of profit taking having witnessed a fairly significant rally of late.
There was little data to contend with, but we had Brazilian stocks off almost 4% on corruption scandals while Canadian drugmaker Valeant’s share price closed over 50% down. Its FOMC and UK budget day today. Nevertheless, in credit we played out flat to slightly better offered in the session. The initial euphoria is over, but the trend is clear in our view – tighter. Also, much focus was on the new issue market and although the overall non-financial volumes were down versus, say, yesterday, there were plenty of deals to look at. Finally, those poorer headlines and weaker stocks saw to it that the synthetic indices backed up leaving iTraxx Main up at 76bp (+4bp) and X-Over at 328bp (+15bp).

Have a good day.

15th March 2016

Living the dream… and a nightmare

MARKET CLOSE:
FTSE 100
6,175, +35
DAX
9,990, +159
S&P 500
2,020, -3
iTraxx Main
72bp, +4bp
iTraxx X-Over Index
315.5bp, +2.5
10 Yr Bund
0.28%, +1bp
iBoxx Corp IG
B+153bp, -6bp 
iBoxx Corp HY Index
B+529bp, -17bp
10 Yr US T-Bond
1.96%, -2bp

It’s great, but there will be consequences… Not wanting to dampen anyone’s spirits, but we have to ponder what might happen once the current spread tightening plays out. We’re going to have to turn to 2017 and think about performance thereafter. If indeed the ECB has altered the nature of the game for the corporate bond market (and possibly for good), it will effectively have commoditised it. A significant and not impossible compression of high and low beta risk would make a mockery of any differentiation we might get between credit ratings, as the distinction between corporate bond risk – as seen through spread markets – diminishes. That is, forget about (relative) value investing, it is all going to be about technicals and momentum. The potential for ECB action and its size and longevity is unprecedented in corporate bond market history (the BoE hoovered up just £3bn or so of bonds, less than 2% of the outstanding market at the time). The boost will have saved performance for everyone in 2016, and 2.0%-or-more-like returns in IG and 5% in HY look possible again. If these kinds of returns are achieved, it will mean that spreads will be at around or through their historic tights by the time we close out 2016. That will leave the question as to how asset managers will return ‘decent’ performance to their investors in 2017. Full-on paper, heavily weighted towards a higher beta positioning (long duration and low credit-rated corporates) and a market which is untradeable (no liquidity) all point to a rather unexciting and worrisome 2017 from a returns perspective. It won’t be exciting, that’s for sure. But before we get there, we live for the moment. Q1 is going to be good, and we expect issuance, tighter spreads and investors scurrying around to get risk on board will all sustain a good feel-good factor and a positive tone through the second quarter.

More aggressive tightening seals recovery… With spreads now tighter YTD on an index basis in IG (iBoxx), benchmark investors will be joining total return funds in recording a positive performance. Most went into 2016 neutral or perhaps – at a stretch – slightly long beta and will therefore be flat or ahead of the index given the spread recovery we have had (assuming they were not over exposed to commodity or AT1 risk). The Markit iBoxx kicked us off in 2016 at B+154bp, saw a high of B+192bp, but after tightening 23bp in the last four sessions alone, it takes us a basis point tighter for the year. Remarkable. The story of the day though had to be the pricing and demand for the 3-tranche DT deal. Priced cheap initially to the curve, the €18bn of demand saw to it that the leads slashed the spread and priced the deal THROUGH the curve. It’s not often that this dynamic has occurred in the primary corporate bond market, especially for such a large transaction, but it might be a harbinger of things to come. The pricing/demand dynamic saw to it that the leads were fast in coming forward and the tightening on the 7-year fixed tranche saw it 5bp through, while flat on the short-dated floater (still +10bp in the 12-year). That will only reprice the older deals tighter. Jumping on the bandwagon and carrying on the tightening trend, Fluor Corp added €500m in a 7-year maturity (-25bp versus IPT), while Mexico’s FEMSA also plumped for 7-year funding and €1bn (and -20bp versus IPT). Rabobank added €2bn for the senior financials and UBS got a $1.5bn 6.875% yielding high trigger CoCo away.

It may not have saved the world… But the ECB’s actions have brightened the outlook for most risk assets. The only sour note in yesterday’s session was that Brent fell below $40 per barrel (-2%, WTI -3%) and while once upon a time that might have elicited some kind of negative response in equities, we simply brushed it aside. Even eurozone industrial production in January rose more than expected on all comparative measures. This will hearten the ECB, but before they get too carried away, there will be concern that the euro hasn’t weakened – nor is it showing signs that it will. In fact, it is up at $1.11, having been as low as $1.08 just after last Thursday’s announcement. Still, equities pushed higher, with the DAX up another 1.6% but just failing to close above 10,000, while other bourses found up to 0.5% of performance in the session. Despite gaining several hundred points in recent sessions, the DAX is still down over 7% this year to date. In government bonds, the bund underperformed, giving back some yield (higher), while the periphery saw some upside as yields here declined a little. For credit, as suggested above, the Markit iBoxx IG index closed out at B+153bp, or 6bp in the session as the grabfest continued. Every industry sector contributed as did every sub-asset class. It wasn’t quite as strong as the previous session, but the die has been cast for corporate bond markets. The underperformance came in the iTraxx indices, with Main higher at 72bp and X-Over at 315.5bp (+2.5bp). The cash market seems like it has now become very technical, all of a sudden; while the synthetic market might be a truer reflection of the risks inherent in credit.

High yield should be back in vogue… Elsewhere, S&P’s latest default comment suggested that the European default rate could rise to 2.4% by the end of the year, which would still be below the long term average of 3.4% seen between 2002-2015. Furthermore, the rating agency added that the negative rating bias is below the historical average, that macroeconomics continue to support a low default rate environment and credit weakness is concentrated in a few small sectors – oil and gas, and mining. There are reasons to be cheerful in this latest report and with refinancing risks likely to be less onerous thanks to the ECB’s latest (IG) largesse, we think that the HY market is likely going to curry much favour. And with that, the HY market closed on a high, with the iBoxx index lower at B+529bp (-17bp in the session). We started the year at B+526bp. Enough said.

Back tomorrow, we trust that you will have a good day.

14th March 2016

It’s a mad, mad world

MARKET CLOSE:
FTSE 100
6,140, +103
DAX
9,831, +333
S&P 500
2,022, +33
iTraxx Main
68bp, -16bp
iTraxx X-Over Index
313bp, -45bp
10 Yr Bund
0.27%, -4bp
iBoxx Corp IG
B+160bp, -10bp 
iBoxx Corp HY Index
B+546bp, -26bp
10 Yr US T-Bond
1.98%, +5bp

Japanification of the corporate bond market, again… We said last week that we believed the ECB would not be participating in the primary non-financial corporate bond market. Our view is that the ECB is lifting covered bonds in primary as a means to finance the banking sector by creating another liquidity transmission mechanism route for it. We believe that this will not be the case for the corporate bond sector (full details of the programme not yet released). Remember, the BoE did not participate in the primary market when it was buying corporate bonds. Amongst other things, this would cause massive distortion to the primary corporate bond market (it will anyway, we suppose). The idea for the ECB’s participation is to further reduce financing costs for the whole corporate sector through a push-down effect. That is, it will participate when it can by adding through the secondary market, and force investors – looking for assets and yield – down the credit curve. The compression between high and low beta spreads will return. How much will it buy – or could it buy – each month, what names and ratings, and who will do the credit work? Will it buy VW debt, can it buy corporate hybrids, insurance company debt and beaten-up commodity sector paper? These are the details that will need to be fleshed out, and the market will await them. In the meantime, and even after they are known, we have a marginal buyer with the deepest pockets of all. All roads lead to a tightening in spreads everywhere. High-yield corporates (not included in the asset purchases) will seize their opportunity, and refinancing of their upcoming redemptions will become easier – and cheaper. The wall of funding maturities in 2017/18 ought to be pushed out further (2020 onwards) and the default rate should stay low even though economic growth will barely rise. Investor risk tolerance will increase, disintermediation of corporate funding expand and finally, we may be approaching the moment of truth for the European corporate bond market. That is, a true Japanification of it as the ECB attempts to “dumb it all down to zero”.

The last throw, almost… This move by the ECB is a real game-changer and totally unprecedented for the euro-denominated corporate debt market. The net effect will be for materially tighter spreads in secondary, lower turnover and volume flows, even fewer relative value trades – thus reduced secondary trading – and higher new issue premiums in primary eventually, once the mad scramble to get cash positions filled has played out its course. All borrowers should benefit, not just those in the eurozone that might be of interest to – or on – the ECB’s shopping list. With rates and yields going higher in the US, there will be a funding advantage (swaps permitting) for US borrowers to hunker down over here, and it will be reasonable to expect a sustained higher level of US-domiciled entities to look at funding in euros.

Junkies, fixes and cold turkeys… The markets called its bluff. The ECB has effectively only a little left in its armoury to “save” the eurozone now, should it need to try again – or add some more. Dramatic and harsh, but fair. We will now all have to tough it out for the next few months because the data will stay fairly poor, but heading into third quarter we will need to see the signs that this huge easing is having an impact. That means the oil which has lubricated this transmission mechanism needs to see loan growth increase, inflation stabilise (or at least no longer decline), growth show signs of a pickup, unemployment fall further and investment pick up. If we see signs that the eurozone economy remains in the doldrums, then we would expect Draghi to look at further easing (he suggested he would) and perhaps a further addition to the asset purchase programme. Thereafter, the eurozone junkie will not know where the next fix is coming from. Unfortunately, there is a greater probability of events playing out this way than there is of politicians enacting the structural reforms needed to achieve sustainability in longer-term economic growth. After all, reforms cost votes, popularity, jobs – and take time, of which we have precious little.

Spreads tighten and yields plummet

Monday Chart 14th March 2016 creditmarketdaily copy

Corporate risk biggest medium term gainer… The ECB will be delighted with its day’s work. It gave the market what it wanted and after some initial reservations, we have all bought into it. In the corporate bond market, we had the hugest of squeezes as we closed out last week. IG spreads crunched better, leaving the Markit iBoxx index recording one of the best gains ever seen as the index level for IG corporates dropped to B+160bp, or 10bp in the session (see chart). That is the lowest level since the opening week of the year, and now just 6bp wider YTD. The yield on the index fell to 1.53% (-13bp) – the lowest since June last year. At the high beta end of the market, the CoCo index yield fell to 6.66% (-72bp), while the spread crunched 70bp tighter to B+695bp, recovering much of the performance lost in January and February. We always said a catalyst was needed for prices to recover in this sector, and the ECB was it. The Deutsche 6% CoCo was up at around €87 (cash price), around 5-6 points higher in the session and 17 points off its low print earlier this year. That follow-through was seen in other subordinated sectors too, for example corporate hybrids. The lift-fest saw to it that prices rose sharply, leaving the index 43bp tighter at B+426bp. These are all stellar recoveries, and new deals now make economical sense for borrowers. We might just see a few emerge. The high yield market was also marked better and the Markit iBoxx HY corporate index 26bp lower at B+546bp as prices improved, rounding off a super day for performance in the corporate bond market. Returns YTD for HY are now a positive 0.85%, having been negative up until the session prior to Friday’s close. In IG, total returns have been positive all year and the sector is now up 1.5% YTD. Elsewhere, peripheral risk was a clear winner. In synthetic credit, the iTraxx levels dropped to their lowest levels of 2016, with Main at 68bp (-16bp) and X-Over at 313bp (-45bp). Bund yields moved 3-4bp lower in intermediate and long maturities, while BTP and Bono yields plunged. The Italian 10-year fell 13bp to 1.32% and the equivalent Bono yield to 1.48% (-10bp).

Supply: Will the sluice gates open?… Now there’s a $64,000 question if ever we saw one. Intuitively, we have to say yes. Syndicates will be chomping at the bit to save their first quarter and rush issuers to get some funding in this week and next. Spreads tighter, yields lower, all-in costs declining and demand huge, with sentiment on the up and little to upset the markets for the moment. They will point to Friday’s deals from APMoeller and Valeo, which lifted a combined €2.1bn on books exceeding €13bn. But wait. There’s no need to rush. The ECB has made its intentions clear and the corporate bond markets will stay better bid come what may (almost). The backstop bid by the biggest player in town with infinitely deep pockets means that funding costs will stay low, “forever” and for everyone. For corporates, each basis point matters for their shareholders and for reasons of bravado versus peer groups. And in this sense, those funding costs will be better in Q2, and likely in Q3 as well. Time, as the saying goes, is money. Wait if you can. Anyway, the IG non-financial supply for the month to date stands at €18bn, and according to data supplied by Dealogic, we’re up at €49bn YTD, which compares unfavourably to the €80bn for the same period last year. In HY, we have been graced with less than €2.5bn, and while IG could easily see €15-20bn printed before the month is out, we would expect HY issuance to remain fairly subdued.

We believe you will have a good week. Back tomorrow.

11th March 2016

Corporate bonds?! Aghhh

MARKET CLOSE:
FTSE 100
6,037, -110
DAX
9,498, -224
S&P 500
1,990, unch
iTraxx Main
84bp, -7bp
iTraxx X-Over Index
358bp, -15bp
10 Yr Bund
0.30%, +6bp
iBoxx Corp IG
B+170bp, -5bp 
iBoxx Corp HY Index
B+592bp, -4bp
10 Yr US T-Bond
1.93%, +5bp

10 and 20 and the stench of more market manipulation… Ten basis points lopped off the deposit rate and €20bn added to the asset purchase programme. It is fair to say that the ECB pretty much overdelivered. But oh dear! They have added IG non-financial corporate bonds to the list of assets they can buy under the bond purchase programme. Someone has been in the asylum too long. Why corporate bonds? The market isn’t broken and doesn’t need fixing. This is a really desperate move and there was absolutely no need for the ECB to meddle. Funding costs for corporates are close to or at historical lows anyway. Corporates can access and finance easily in the capital markets. Yet the ECB decided to take on all the risks associated with buying corporate bonds. Incredible. For investors, we think this is a blow. The last thing needed in a liquidity-parched market is a marginal buyer with the deepest pockets of them all joining the party. This new kid in town is what we have always dreaded. The Bank of England did it before and, in our view, unnecessarily. This move serves to extend the hand of manipulation the central banks have employed since the crisis began, and will eventually frustrate investors in the corporate bond market. It’s now a case of “we have given you what you wanted, now do your bit”. The immediate reaction was for equities to lurch higher, the euro weakened, government bond yields ratcheted lower and credit spreads tightened meaning lower funding costs “forever” and an immediate boost to performance for all and sundry. But what next? hey will force market participants to add higher levels of risk as investors will be crowded out of the better end of the market and move lower down the risk totem pole in their search for paper and yield. The high/low beta compression trade is back on. Bottom line: we just might see those record low corporate bond yields and spreads again – and soon. Relative value was already out of the window; this is the final nail in the coffin. Buy and hold the highest beta asset (within reason) that you can. Why trade?!

Boy, did he kitchen sink it… But what if the measures don’t work? What if the euro doesn’t weaken (much more), or corporates don’t really tap into the even cheaper funding? What if the “pass-through” objective doesn’t happen? The cheap money needs to get working in the real economy. They need to see results soon, very soon. In investment, inflation, consumer spending and growth. Or the helicopter beckons. For corporates, the idea must be for them to raise even cheaper funding and use the proceeds to invest. But they are already cash-rich and frustrated that their booty isn’t yielding higher returns (invested in fixed or financial assets). Now things will get worse for corporate treasuries. And we don’t think it will necessarily open the floodgates for issuance. After all, corporate treasurers will be able to bide their time to fund, knowing that conditions will be kind for the foreseeable future. The banks will probably take the plethora of announced rate cuts on the chin.

Great for performance for Q1, we think… This is a massive risk-on signal for corporate bonds. but all risk asset classes ought to get a one-off major performance boost from it. There will be a lot of high-fiving.  Specifically, corporate bond markets will rally much more though, and we look for spreads to recover their losses (widening) seen this year through the second quarter (currently +15bp). Investors will feed into the better sentiment, feeling confident that the corporate bond market is well supported and that any future weakness in spreads is unlikely to last for a prolonged period of time. Our risk now will possibly only be around single-name events. Supply risk will no longer be an issue on wider spreads, as we likely won’t be able to get enough! New issue premiums will likely rise  given secondary will be so rich – ECB can’t buy in primary like they do covered bonds – and we might see lower-rated IG entities push for longer maturity deals. The high yield market might roar back to life and finally decorrelate from the US HY market. It’s all rather bullish for the corporate bond market.

Cock-a-hoop market response later completely reversed… The market initially greeted the ECB statement with great gusto, rallying aggressively across the board, only to fade the rally hard following comments made at the press conference where Draghi suggested further interest rate cuts were unlikely. Of course, the ECB could renege on that. Anyway, stocks came off their intra-day highs to close out deep in the red. The DAX for example was 2.5% higher at one stage but ended the session 2.3% lower! Government bond yields reversed their gains too with the 10-year Bund yield left at 0.30% (+6bp) having seen 0.15% earlier in the session. Front-end yields rose, with the 2-year at -0.46% (+9bp). In the periphery, it was a similar, if not even more dramatic a turnaround. Italian and Spanish 10-year yields dropped 15bp initially only to reverse that and climb 2bp into the close for Spain, and 4bp higher for BTPs at 1.45%. Gilts also sold off, the 10-year now yielding 1.54% (+7bp). Of more concern perhaps was that the euro fell initially versus the dollar to $1.0822 but recovered and closed the session higher (at $1.1191). Bit of the “Yen syndrome” here. Oil fell too, not because of the ECB, but because of the lack of commitments (from Iran) around production freezes. Ending on a high note, the corporate bond market rallied through to the final whistle. The Markit iBoxx index for IG corporate bonds was 5bp tighter at B+170bp and now just 15bp wider YTD. CoCos closed up (in price) such that the index was almost 60bp tighter and the index yield fell to 7.38% from 7.85%. Likewise, corporate hybrids rallied with around 35bp of index tightening and it followed through into the subordinated financials sector. The HY market was less enthused, but we think that might change eventually. The index just fell by 4bp to B+592bp. There iTraxx indices closed off their lows, but still register a strong rally. Main was eventually lower at 84bp and X-Over at 358bp as credit insurance costs plummeted.

We closing out with the market thinking it must be bad for the ECB to unleash such a heavy and broad arsenal of easing measures (which is what we actually wanted them to do). However, there is no more additional stimulus for a while; time for structural reform and fundamentals, but before that a bit of the cold turkey treatment.

Have a good weekend. Back Monday.

10th March 2016

20:20 Vision

MARKET CLOSE:
FTSE 100
6,146, +21
DAX
9,773, +30
S&P 500
1,989, +10
iTraxx Main
91bp, -1bp
iTraxx X-Over Index
373bp, -6bp
10 Yr Bund
0.24%, +6bp
iBoxx Corp IG
B+175bp, -0.5bp 
iBoxx Corp HY Index
B+592bp, -4bp
10 Yr US T-Bond
1.89%, +6bp

(Not) a whole lotta shaking’ going’ on… With the ECB looming, few were ever going to get excited with respect to positioning and risk-taking immediately before any announcement. It was a case of every man (asset class) for himself, with no clear trend established between them. That’s how the day started, but an upbeat tone prevailed and we saw a decent rally in risk assets. So what do we want from the ECB? As a minimum, 10bp off the deposit rate and €10bn added to the monthly asset purchase programme. To excite us and get us into the mood to add risk and rally good next week, we want 20bp lopped off the deposit rate and €20bn added to the asset purchase programme. That would invigorate the markets and see to it that the first quarter recovers the rest of the lost performance from January and February, and set us up for an intriguing second quarter. With data showing a clear downside to risks, there should be enough there to keep the hawks (particularly Germany) at bay and finally let the ECB show that it has some teeth. However, and as ever with consensus politics, the ECB will likely fall short on the 20:20, and either give us the 10:10 or – more likely – something in between. We will be none the wiser for it and if, as we expect, the data continues to disappoint, we will be clamouring for more post-haste. In the meantime, who would have believed oil prices would be up at $40 per barrel given that they were $26 back in mid-January? Or that equity indices would be down in the low single-digit losses YTD after being as much as 18% lower? Or that the corporate bond market would maintain a positive total return through the year so far despite spreads being wider by 35bp at one stage? That points to some recovery for the oil and equity sectors, and highlights the inherent stability and attractiveness of the IG corporate bond market.

Default rate to tick higher, but stay at low levels… Moody’s released comments that it expects the default rate to rise to 4.7% over the next 12 months and surpass the average established since 2010. That might be the case – and it’s a good headline – but most of the defaults are arising in the US and Asia and are in the commodity-related sector. We think the rate will stay at or below the long-term average in Europe for the next 12 months, but thereafter the default situation will increasingly depend on funding conditions for HY entities and the state of the eurozone economy. For sure, there is no onerous “wall of redemptions” which need refinancing in 2016 and 2017, but there are potential problems being stored up for 2018 and beyond. Below we show the European corporate monthly speculative default rate, as supplied by S&P, going back to 2010. European HY still looks like good value at current levels at this point and we would retain exposure to it, albeit in the double-B sector, liquidity permitting. Certainly, the transmission risk for double-B entities over a 3 to 5-year period are low and manageable.

European speculative grade default rate

Screen Shot 2016-03-09 at 17.47.21

Primary revving up… Ferrari issued its inaugural €500m deal in a 7-year maturity (unrated, but priced as a low IG issue), while RCI Banque also clipped €500m in a 3-year FRN format. The Ferrari deal was over 4x subscribed. Pemex issued a dual tranche deal totalling €2.25bn in what looked like a steal for investors. The company might be IG rated, but they’re tarnished with the EM tag, and that means they have to pay-up. The 3-year was priced at midswaps+395bp and the 5-year at midswaps+495bp, with final books of around €6bn. The deal which probably captured the imagination though was the 3-tranche effort from Berkshire Hathaway. Following hot on the heels of the huge dollar transaction on Tuesday ($9bn over seven tranches), they were over here taking down €2.75bn in 4, 8 and 12-year funding. It caps a very good week so far for issuance (almost €7bn in non-financial IG), pre-ECB, and better than what we thought otherwise might have been the case.

Over to you Mr Draghi, time to deliver… We closed out Wednesday on a mixed note after the earlier strong rally fizzled out. It was as if the market suddenly got cold feet! Having been well over 1% for most of the session, European stocks ended just a small up as the nerves started to fray. Oil had no such qualms and settled on the order of 3% higher with Brent at around $41 per barrel. Government bonds were materially weaker, with Gilts, Treasuries and Bunds giving up all the previous day’s gains. The 10-year Bund yield closed at 0.24% which was last week’s high point having backed up 6bp in the session, as did the 10-year UST to 1.89%. The periphery actually outperformed with 10-year BTPs and Bonos now yielding 1.41% and 1.56%, respectively, and a tad lower in the session. In the corporate bond market, the focus was squarely on the big primary issuance, so secondary was subdued and just limped along. We closed out a touch better with IG corporates as measured by the Markit iBoxx index at B+175bp while HY risk was better leaving the index at B+592bp (-4bp). The indices closed better too at 91bp and 373bp for Main and X-over, respectively.

We will know soon enough, have a good day.

9th March 2016

From China to the ECB

MARKET CLOSE:
FTSE 100
6,125, -57
DAX
9,693, -86
S&P 500
1,979, -23
iTraxx Main
92bp, +2bp
iTraxx X-Over Index
379bp, +10bp
10 Yr Bund
0.18%, -4bp
iBoxx Corp IG
B+175.3bp, +0.5bp 
iBoxx Corp HY Index
B+596bp, +1bp
10 Yr US T-Bond
1.83%, -8bp

Method in the madness… Where else to start but with China? You just can’t keep a bad data print down with those shocking trade numbers out yesterday. A drop in exports for February of 25.4% YoY – and a fall in imports of 13.8% – were both far worse than expectations, so no surprise therefore that the Chinese served up bit of a stimulus package over the weekend designed to shore up the domestic economy. Meanwhile, German industrial production jumped by a whopping 3.3% in January, so something somewhere isn’t quite tallying up. There might be an element of seasonality in the Chinese data (late lunar year in 2015 etc), but the picture isn’t great and small wonder the Chinese “ranged” their growth forecasts for 2016 for the first time – at between 6.5-7%. It was bit of a knock-out blow for the markets and put paid to any hope that we might have stabilised or perked up into the ECB meeting, but it gives much food for thought as to how the poor Chinese/excellent German data might weigh on the QE decision. We need a 20bp deposit rate cut and €15-20bn added to the monthly asset purchase programme to keep the markets ticking over with a positive bias through to quarter-end and possibly for much of Q2. Anything short of that will be met with much disappointment and derision, in our view. Unfortunately, the ECB has rarely, if ever, thrown us the right-sized bone. Some might ask why the ECB should play to the market tune and satisfy its every whim. In hindsight, the market has actually been right (suggesting more aggressive easing than delivered) given we’re into the eighth year of the downturn and quite possibly will have to endure a few more weaker years, at least.

What goes up, must come down… So the saying goes. And we saw exactly that with government bond playing into the risk-off tone and yields dropping quite markedly. We might have had the 10-year Bund at 0.24% post payrolls, but it is now yielding 0.18% (-4bp in the session, off the intraday low) and seemingly on the way (again) to 0.10% and, we think, ultimately through the previous record low of 0.05%. Gilt yields plummeted with the 10-year down at 1.38% (-10bp) in a big flattening move. Likewise in the US, there was a flattening move in the Treasury curve as the 10-year yield dropped 8bp (2-year by 4bp). Stocks have had a super recovery run of late but were down again for much of the session before seeing a fight back, only to lose steam into the close and end almost 1% lower in Europe. Credit wasn’t spared, but the weakness in spread markets was minimal. The new issue market for non-financial corporates saw just a €350m print from Securitas and €500m from Hammerson, while covereds and SSAs once again dominated. The running total for the week in non-financial primary issuance is now €2.85bn (IFF and America Movil on Monday). Elsewhere, DVB Bank was the senior banking sector’s sole contributor with a €500m deal. We suggested previously that it might be a more limited corporate primary market this week and that is how it is playing out. The data hasn’t helped and there’s the small matter of the ECB meeting. Today might bring a deal or two to the table, but we don’t hold out for anything on Thursday or Friday.

Credit plays out quite well… The corporate bond market withdrew its interest in a session that saw the action, whatever little there was, elsewhere. The Markit iBoxx IG corporate bond index closed just 0.5bp wider at B+175.3bp while there was little discernible price action anywhere. In HY, we were left pretty much unchanged which is a good sign given the weakness in stocks and the usual close correlation between the two asset classes. It’s also fair to say that the synthetic indices also performed very well – admittedly weaker and underperforming cash, but measured with it. They were better bid, with Main up at 92bp and X-Over higher at 379bp.

US equities lost ground into the close, with the S&P finally down by 1.12% which will probably leave us with an uncertain open. Try and have a good day, back in the morning.

8th March 2016

ECB’s Power Rangers to the rescue

MARKET CLOSE:
FTSE 100
6,182, -18
DAX
9,779, -46
S&P 500
2,002, +2
iTraxx Main
90bp, -2.5bp
iTraxx X-Over Index
369.5bp, -4.5bp
10 Yr Bund
0.22%, -1bp
iBoxx Corp IG
B+174.8bp, unch 
iBoxx Corp HY Index
B+595bp, -4bp
10 Yr US T-Bond
1.90%, +3bp

Waiting for a defining moment… This week could well define not just the first term but the first half of 2016 in with respect to performance. It has the potential to deliver a binary outcome. If the ECB throws the kitchen sink at it – that means a 20bp deposit cut and €15-20bn on the asset purchase programme – then the markets will be all cock-a-hoop and rally hard into it, especially after the reception we gave to the potential for a sustainable recovery in the US at the back end of last week. On the other hand, if it moves with the baby steps for which it has form – driven by consensus politics and now bowing to market expectations – we will be left with the usual air of uncertainty. That will probably mean an initial rally of sorts, which we will fade, and then reviewing the situation as and when the incoming data dictates. No squeezy bum time, just a bit of pragmatism. And it seems that is what we saw in yesterday’s session. Oil prices per barrel rose, metals prices were on the up and Chinese reserves fell – though less than expected. Yet Italian producer prices declined again in January, as did German factory orders. After a good week just passed, we were off to a weaker one as equities came off by around 1% or more and decided to take a cautious positioning. Credit followed, with the synthetic indices higher (credit insurance costs higher) and cash under some widening bias. There was just one deal on the new issuance front, although we read little into that given that Mondays are usually subdued at the best of times.

Time to step away from the herd… Such is the difficulty in having any kind of conviction that we now see oil price positioning has become bullish. Brent has thus pushed upwards of $40 per barrel and is almost 5% higher YTD (versus -35% in January). Why? The US shale rig count has dropped by 50% since its peak, and we can’t of think of much else to justify such an aggressive turnaround save for the view that we had dropped too far in the first place. It does seem like fast money is dictating the direction of commodity prices. This matters, because it can and has impacted sentiment such that other asset classes get caught up in the price action and move undeservedly, unable to decorrelate. That is exactly what we have observed since the beginning of 2014 in the HY asset class in corporate credit. That shale boom and subsequent bust beat up the HY market as a whole in the US (only now recovering off the lows) as the contagion impact got the sector a little hot under the collar. A still fledgling HY market in Europe felt the heat and has sold off aggressively too. Fledgling because we should have stepped back and not sold off into that HY weakness. And that’s even as the default rate has been pinned at under 3% for European HY corporates for the past 6 years, while in the YTD we have seen a paltry €2.5bn in supply (almost €50bn average per year in 2013-2015). Those dynamics alone ought to come to the rescue of HY valuations in Europe, and the wide spreads suggest some low-hanging fruit is ripe for picking. If the opportunity presents itself, why not?

Off the lows, everywhere – but headlines around oil… We closed out the session with everything pretty much off the lows. Bund yields closed off them with the 10-year at 0.22% having resided at 0.20% for much of it, for example. Equities recovered to close less in the red, the DAX for example over 1% lower in the session only to recover to finish 0.46% down. That pattern was repeated in other equity bourses. Oil was the exception as Brent had a super day ending close on $41 per barrel. Incredibly, corporate bond spreads as measured by the Markit iBoxx corporate bond index for IG closed completely unchanged at B+174.8! The index yield was a tad lower as the underlying was better bid. Within that though, the higher beta sectors (hybrids) saw some moderate weakness as did the CoCo sector. High yield spreads closed a touch better for choice as the sectors recovery continued with spreads at B+595bp and the index yield at 5.65% was 5bp lower (it was 6.43% a month ago). iTraxx Main outperformed with the index down at 90bp and X-Over dropped a touch to a shade under 370bp. Triple-B rated International Flavours and Fragrances (!) was the only deal in the market, adding €500m in 8 year funding for the US borrower.

Back tomorrow, have a good day.

7th March 2016

What you talking ’bout Willis?

MARKET CLOSE:
FTSE 100
6,199, +69
DAX
9,824, +72
S&P 500
2,000, +7
iTraxx Main
92.5bp, -3.5bp
iTraxx X-Over Index
374bp, -15bp
10 Yr Bund
0.24%, +7bp
iBoxx Corp IG
B+174.8bp, -1.5bp 
iBoxx Corp HY Index
B+598bp, -11bp
10 Yr US T-Bond
1.87%, +4bp

Markets look on the bright side… There is every reason for corporate bond market cash spreads to continue to tighten from here and through March. We clawed back 11bp last week in the IG index, and the improved sentiment on the back of the US jobs data ought to help maintain a better bid for risk assets generally. Sifting through the chaff, the headline jobs figure was very uplifting and the unemployment rate stable but, with wage growth slipping in the month, we think that the Fed can and should wait. The US economy has faced some headwinds of late and the economic data hasn’t been particularly cheery. Playing it safe rather than risking being sorry appears to be the prudent course of action to take at the next meeting in two weeks’ time. For now though, all eyes turn to the ECB. They will no doubt take some action because the economic trajectory and dynamic in the eurozone are quite different to those in the US. The policy paths will diverge and should give a further boost – if only a short-term one – to risk assets. It’s a win-win, but for all the wrong reasons. That doesn’t matter for the moment. We can understand that the corporate market is having a torrid time this year (wider spreads, essentially), but it has fared relatively well in terms of volatility and specific event risk when set against its more ‘illustrious’ cousins: equities and commodities have been the place not to be. The iTraxx indices will play to the tune of macro, volatility in equities and other event risk. Corporate bond markets will and ought to continue to look on from the sidelines, quietly absorbing new deals – should we get borrowers willing to print them – while secondary will be directional, with little of the exaggerated moves seen in equities and oil as and when the newsflow has dictated.

Stranger things have happened… At 9,824, the DAX is “just” 919 points away from being flat for the year to date (-8.5%), having managed to claw back a deficit that was once 18.5% (or -2044 points). The FTSE is only 43 points off being flat, needing to rise by a mere 0.7% to get there. And the S&P 500 needs to climb by just 2% to achieve the same feat. For the latter two, we could be there before this week is out, while for the DAX, that could well happen some time into the week after, depending on what emerges from the ECB come Thursday. By the way, oil, as measured by Brent, is a dollar higher per barrel YTD ($38.7). It was only several weeks ago that it was more than 35% or $12 per barrel lower. That level of volatility is impossible to trade. The recovery, though, has been motivated by the fact the ECB is likely to provide more stimulus, although we would think the market is choosing to believe that the US, despite some very mixed data prints, is steering a course to economic safety (some kind of sustainable growth, albeit at a lower rate). The equities story has been all the more remarkable because they have been so resilient for several years in the face of a tidal wave of poor post-crisis economic newsflow. Central bank stimulus has done its job.

Has the fightback started?

HY Chart 07Mar16

Risk assets fight back… Government bonds gave some performance back in the week, with 10-year Bund yields rising to 0.24% having seen a 0.10% intra-day low earlier in the week. The big backup in the 10-year on Friday (+7bp) saw to it that they underperformed versus the periphery, with BTPs and Bonos 2-4bp higher at 1.46% and 1.55% respectively. That was probably suggestive of some profit-taking. The 10-year Treasury backed up 17bp in yield to 1.87%. In credit, low beta IG outperformed (B+175bp, now +21bp YTD), while we saw little or no real move in CoCos or corporate hybrid sectors into last week’s close. The Markit iBoxx high yield index was back through B+600bp and 40bp lower in the week to B+598bp. The index yield was down at 5.70%. The high spread for 2016 was B+668bp just three weeks ago, and the high on the index yield 6.43%. Feeding into the better tone, the iTraxx indices saw Main down at 92.5bp and X-Over better offered at 374bp, some 10bp and 47bp lower respectively. Not quite up by the stairs, but certainly down by the elevator. Primary markets also had a good week, although the €11.5bn in IG came mostly from four borrowers lifting multi-tranche funding (BP, Daimler, IBM and BT). It is difficult to ascertain how this week might pan out, but let’s hope a few look to get something done ahead of the ECB, although it doesn’t take much to work out that there will be plenty of opportunity post-ECB, likely on better all-in terms. Chinese export/import and inflation data could set the tone as we kick off proceedings this week.

Have a good week.

4th March 2016

The curious case of missing primary

MARKET CLOSE:
FTSE 100
6,130, -17
DAX
9,752, -25
S&P 500
1,993, +7
iTraxx Main
96bp, +0.5bp
iTraxx X-Over Index
389bp, -2bp
10 Yr Bund
0.59%, -3bp
iBoxx Corp IG
B+176.3bp, -1bp 
iBoxx Corp HY Index
B+609bp, -1bp
10 Yr US T-Bond
1.83%, -1bp

Shy in coming forward… There was a time, not so long ago, that we had over €120bn of IG non-financial supply in the first quarter of the year. At the peak of the financial crisis, in Q1 2009, issuers printed deals at record high funding levels just to get some cash on board. That record quarter for issuance led to a record year (€280bn). The crisis unfolded rapidly and had an almost immediate effect on sentiment, as a systemic financial event was potentially unfolding (Bear Stearns, Lehman, CDO leverage unwind). The banks were caught in the headlights and effectively refused lending despite committed facilities being in place. Thus the need for corporates to have back-up liquidity on their balance sheets saw them access the market in their droves. No word then about earnings-related blackout periods impacting issuance. It was seen as prudent to get the funding in, whatever the cost. Since then, anywhere upwards of €70bn of issuance has been “the norm” in the opening quarter. This time, and adding in today’s €6bn of issuance, we are at €37bn. That is a poor level in comparison, with admittedly three weeks of the quarter still to go, but if we manage to hit €55bn by the end of the quarter we will be surprised. Remember, almost half the supply has come from just four borrowers! This is all occurring at a time when the market’s growth has mushroomed while demand for corporate paper through primary is at extremely high levels. Funding levels are also still at historically very good levels for entities wishing to access the market. We had high hopes that €240bn per year of issuance (the average of the last 3-4 years) would be maintained – see the chart below. Taking seasonality into account, that now seems unlikely for 2016. Is the crisis really taking its toll? The penny has finally dropped that low rates, low yields and relatively tight spreads are with us for an extended period of time. One can pick and choose one’s moment to fund. The global outlook is not improving – in fact, judging by all the growth revisions of late, it is worsening. That leaves corporates as likely funding capex and investment out of recurring free cashflow and bank facilities. So why hoard “costly to invest” liquidity, even if it is still historically cheap to raise? We are reducing our non-financial IG supply forecast to €200bn, from around €240bn previously (see chart).

Where have all the borrowers gone?

 

2016 issuance YTD

Good day for primary… Having said all that, we were greeted with several deals today totalling some €6bn. BT was the first out with a €3.9bn, 3-tranche transaction split across 5, 7 and 10-year maturities on demand of €13bn. Coca-Cola HBC finally printed its long awaited €600m deal (books €3bn) in a long 8-year deal, while German material sciences group Covestro (Baa2) took €1.5bn, also in a 3-tranche offering. These were good, mid triple-B rated borrowers and just what the market likes. Days like this are too infrequent, unfortunately, and we do not expect much more from primary ahead of next week’s decision from the ECB. Senior, unsecured bank deals were missing although we had the usual spate of covered bond and SSA deals to contend with.

Non-farm report holds court… And while it does, the markets will sit back and wait. Service sector PMIs in the eurozone and UK were the latest batch of data to disappoint but other than that, we played out in a tight range and mainly in the red. It has overall though been a good week and a good start to the month for risk assets. We closed out with European equities around 0.25% lower, oil prices a little higher and government bond yields considerably lower. That is, the 2-year Bund yield fell to yet another record low at -0.59% (-3bp) and the 10-year dropped to 0.17% (-4bp) having risen off a 10-month low of 11bp seen a few sessions ago. BTP and Bono 10-year yields fell too, left at 1.42% and 1.53%, respectively. In corporate bonds, we had another day of tightening. The Markit iBoxx IG index was at 176.3bp (-1bp) and the index yield at 1.59% (-4bp) owing to the rally in the underlying. That is the lowest IG index yield since early December 2015. That tightening didn’t really follow through elsewhere, and the HY market as well as other high beta sectors all closed unchanged. The iTraxx indices also closed unchanged having played out in a narrow range through the session.

On to non-farm payrolls. Have a restful weekend.

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