1st April 2016

Corporate bonds? Oh yes!

MARKET CLOSE:
FTSE 100
6,175, -28
DAX
9,966, -81
S&P 500
2,060, -4
iTraxx Main
73bp, +1bp
iTraxx X-Over Index
304bp, -8bp
10 Yr Bund
0.15%, unch
iBoxx Corp IG
B+154bp, unch 
iBoxx Corp HY Index
B+539bp, -3bp
10 Yr US T-Bond
1.79%, -3bp

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Time to reflect…

The shock and awe felt from those month-end statements for January and February have been replaced by a very comforting March quarter-end feeling. The month has witnessed a great recovery, which now leaves us with decisions to make. ecb-buildingGo all in with the ECB, play it safe in case the next round of QE doesn’t work, or do nothing. The first might enable us to squeeze out extra performance and take us to the top of our peer group. The second would see us take some chips off the table and invest in safe, lower yielding risk but weather any subsequent volatility on the front foot. Doing nothing shouldn’t be an option. We sit somewhere between the first two possibilities.

While we don’t suggest going “all in”, we think taking on additional risk will reap dividends through the second quarter. That’s because we think spreads are going tighter, yields most likely lower, the compression trade will kick in and higher beta risk will outperform. The ECB is going to make all the difference for Q2 – and quite likely beyond, for the corporate bond market anyway. Taking risk – trekking lower in credit quality and longer in duration – should work.

Performance warms the cockles, Q2 promises much more

The headlines were not great. German job creation fell for the first time in 7 months, oil was back below $40 with all hands to the pump for the Iranians, China’s AA- rating was assigned a negative outlook and Spain’s budget deficit was a shocking 5.2% of GDP, while the euro rose against the dollar to $1.14. But we are going to put all this to one side. Instead, we are going to focus on satisfying performance figures. Equities have roared back, as has oil in March. Government bonds have been rock solid stable. And corporate bonds have joined a bandwagon that was trying to sweep away all in its path to better climes.

The ECB hasn’t saved the world, just a quarter – or perhaps the year – of performance. The fact that rates are at zero or below, that the central bank is hoovering up €80bn of bonds from this month (€20bn more per month) and the world is awash with liquidity while the Fed is likely going to hold off on a rate rise in April all testify to that. But there is business to be done. We closed out the session with European equities 1% or so weaker, oil flattish having been lower earlier in the day and government bonds unchanged.

As for credit, the market closed completely unchanged – and at B+154bp, the Markit iBoxx IG corporate bond index is also unchanged year-to-date. But the story is with returns. IG credit is up 2.2% YTD and HY +1.35%. IG non-financials have returned 3% in the quarter and the financials index just +1.25%. Eurozone government bonds top the list at +3.5% while sterling-denominated corporate debt has returned almost 3%! What Brexit fears? US equities are a small up and the FTSE a small down in the opening quarter. The worst of it is around eurozone equities with the €Stoxx50 down 8.5% YTD and the DAX some -7.2%. It was worse – much worse, and the big negative numbers hide those previous ills. Finally, volatile oil saw Brent close up a little over 6% in the quarter.

Fixed income a steadying influence

2016 Returns Comparison Jan-Mar

The above chart can also be found here, updated monthly.

Primary draws to a close, what a month!

In the new issue market, we got very little – as we could expect given it was month-end and before today’s non-farms report. TDF Infrastructure was the sole euro-denominated deal, with the group taking €800m in 10-year funding and 20bp inside the initial price talk on books around €2.25bn. The deal was announced on Wednesday and IPT was only announced on Thursday – we think it was bit of a slow burner, given there have been no competing transactions. Still, it took the total for IG non-financial issuance in March to €45.8bn, the second best month ever.

A busy time for Daimler

Busy times for Daimler

Elsewhere, Daimler has been busy of late. Having raised €3.5bn earlier this month in a single-shot 3-tranche deal, the group printed a 4-year deal in US$ on Wednesday and yesterday came with a long 6-year sterling transaction. Our first instinct is to ask why bother with non-€ deals, as the ECB can’t buy them? The explanation could be as simple as that they just needed dollar and sterling funding. Or some might assume that they swapped it back to euros. If Daimler did swap it back, the two deals equate to levels of around midswaps+48-50bp (excluding “costs”), which means they sit right on the issuer’s secondary euro-denominated debt curve.

A bullet euro deal in the 5-7 year maturity would probably need a new issue premium of 10-15bp, meaning that if the company did swap it, it still managed an attractive funding level. Anyway, we close out the month with €4.4bn issued in the HY market and €22.4bn of senior bank prints. These are good numbers all round after what were a difficult opening couple of months to the year.

US non-farms are up later. Have a good weekend, back on 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.