16th February 2016

We can work it out

MARKET CLOSE:
FTSE 100
5,824, +117
DAX
9,207, +239
S&P 500
1,865, closed
iTraxx Main
115bp, -3bp
iTraxx X-Over Index
450bp, -14bp
10 Yr Bund
0.24%, -2bp
iBoxx Corp IG
B+189bp, -1bp 
iBoxx Corp HY Index
B+662bp, -6bp
10 Yr US T-Bond
1.75%, closed

It’s all good, again… Two days of stellar gains and the crisis is over. In a flash. 2%+ gains on Friday and 3%+ on some equity bourses on Monday, and we can forget that China came up with yet another poor export/import performance in January and that Japanese industrial production slumped dramatically in the same month. The headwinds to a glorious economic recovery remain the same, but the mood in equity markets has flipped. We’re not sure why. Maybe the market was oversold – we know macro is bad and will stay that way, but more importantly we are not going to fall off a cliff. A Goldilocks-type economic trajectory, where we probably blow a little on the cooler side, which would leave the central banks keeping it all chugging along through, say, 2016. That would be good for the corporate bond market. Higher beta risk should outperform. But the addition of riskier paper will be dependent on how equities react. If they have found their floor and can stay at around these levels or better then we might start to get some incremental recovery in corporate bonds, and that would include higher beta risk all the way down to the CoCo bond market – eventually. We have some important inflation data points being released this week, and if they continue to show a disinflationary/deflationary trend (which they will), then the market will get more comfortable with the potential for no imminent rate hike in the US but for further easing from the ECB. That would leave equities with some fuel to fire up some more, and that improved sentiment will not be lost on credit markets. It wasn’t in Monday’s session, with the primary markets open and US borrowers not shy in stepping forward despite the domestic holiday. Our view: we stay a little circumspect; the aforementioned upbeat possibilities are too clean, too precise and too good to work out with such a clear trajectory. There are opportunities, though, and there will be more soon enough. Still, it was a very strong day. Equities led the way, but we faded the initial big bounces in iTraxx synthetic markets. Cash in secondary saw subdued activity, but some oversold situations did manage a decent recovery (Deutsche’s 6% CoCo +3 points). The focus was on primary

Primary only place to chase a NIP. Why buy illiquid secondary?… There’s nothing dulling appetite for corporate bonds. Investors may be shying away from lifting much in the secondary market, but they’re piling into primary. The herd mentality never left us. So much so that borrowers – and US ones at that – are happily taking our cash/funding. Such was the demand that initially cheap price guidance was being ratcheted tighter. With little by way of material outflows, and corporate bond returns around 0% YTD (equities double-digit losses YTD), there is confidence around adding risk – through primary. And that includes for US corporates, which were shunned through the whole of January where last year’s preponderance of deals had seen some aggressive negative price action. Well, they’re back, and we’ve forgiven, and/or forgotten. High triple-B rated Carnival Corp took €500m in a 5-year transaction at midswaps+160bp (-5bp versus IPT), while Honeywell plundered €4bn in a 4-tranche transaction out to 12-year maturities (on word that books were around a fantastic €20bn). Depending on the tranche, pricing was tightened by up to 15bp. That’s almost €16.5bn issued in IG non-financials YTD. In senior financials, Nordea took €2bn and ING €1.25bn in a fairly busy start to the week.

Draghi talks tough, euro weakens… In musings to a European parliamentary committee, Draghi managed to wield some magic yet again and bring the euro down to $1.11. He defended QE/negative rates and the impact they have had on growth but acknowledged the failure to boost inflation. With the ECB “ready to do its part”, he have a push to government bonds, with the 2-year Bund yield down at -0.53%, the 5-year to -0.31% and the 10-year closed out lower at 0.24%. Italian, Spanish and Portuguese bonds got a bid too, the latter some 21bp lower at 3.48% (10-year). All good stuff from Draghi overall, and little otherwise to ruffle feathers. We closed out with the DAX up 240 points (2.7%) and the CAC some 3% higher. Oil barely moved, but after 10% plus gains at the end of last week, that was to be expected. For the cash market, the Markit iBoxx IG corporate index managed to tighten by just a basis point, to B+189bp, illustrating the lacklustre effort in the secondary market. The recovery in bank subordinated debt was the highlight of the day and left the CoCo index yield down at around 10.5% (-60bp). After the close, Anglo American’s rating was cut to Ba3 from Baa3 (three notches) in a fairly ruthless move by Moody’s – the outlook was left at negative. In HY, we had just 6bp of recovery which goes to show how suspicious credit market participants are – or, the lack of interest to get involved. The synthetic indices were left with Main at 115bp and X-Over at 450bp, having faded earlier lower levels. For example, X-Over was down at 436bp during a quite euphoric open.

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.