29th July 2016

Don’t do it, there’s no need to

MARKET CLOSE:
FTSE 100
6,721, -29
DAX
10,275, -45
S&P 500
2,170, +3
iTraxx Main
70bp, +0.5bp
iTraxx X-Over Index
322bp, +3bp
10 Yr Bund
-0.09%, -1bp
iBoxx Corp IG
B+127bp, +0.5bp 
iBoxx Corp HY Index
B+460bp, -1bp
10 Yr US T-Bond
1.51%, +1bp

BoE, QE and corporate bonds: You have got to be kidding!…

dontThey didn’t know why they did it last time, they won’t know why if they do it again. It was a policy error last time, it will be again. In responding to reports/comments that the BoE’s expected stimulus package (MPC meeting next week) will be a rate cut and some sort of bond buying program, we would be very surprised to see them add corporate bonds to any QE measures they might decide to undertake. The corporate bond market is not broken, doesn’t need fixing, and certainly does not need the heavy hand of central bank meddling and manipulation.

The BoE tried it before, barely lifted £3bn and ended up selling them back into the market several years later. They will only annoy and frustrate investors in a market already grappling with illiquidity and one that hasn’t even managed to issue over £20bn of new debt for each of the last 2-3 years.

It is not as if investment grade corporates domiciled in the UK have funding/capex/investing issues. Once the politicians get macro right, everything else will fall into place! A corporate bond buying program would serve little purpose in terms of injecting cash into the real economy, as corporates will refinance and hold on to their fortune. Besides, the yield on the iBoxx corporate bond index for sterling corporates is already at an historic low of 2.73% while the spread at G+163bp is just 30bp off lows seen last year. They are not going higher anytime soon, and IG corporates looking to finance in this market already can do so very easily – and at their lowest ever funding costs.

Decent earnings, but markets not convinced…

A very mixed session greeted us on Thursday into a whole raft of earnings and other reports with some economic data thrown in, which overall were better than we ought to have expected. The bad in them saw weakness for those companies in the UK hit by currency movements as well as oil majors which took a hit on the back of the low oil price; while others did very well like BT, Anglo American (on debt reduction), Diageo and Adidas. The markets reacted to individual names, but overall, it does seems like it is all out for the summer given we went through another lacklustre session.

German unemployment continued to decline, Eurozone confidence surprisingly rose in June, and the dollar flapped as the market took a view of a rate increase come September being unlikely. In the UK, the earnings reports were more skewed to the downside overall, and some (non-UK based) companies chose to cut investment into the post-referendum uncertainty. The cynic in us has this as an excuse, rather than any hard evidence that this level of caution is warranted.

Equities again played out in a tight range, oscillating between trading in the red and black, government bonds were better bid and the 10-year Gilt yield saw its record low during the session (of 0.698%). The yield in this maturity eventually closed at 0.71%, while the equivalent Bund yield was at -0.09% (-1bp). It has not escaped us that peripheral yields are edging lower too, with 10-year Bonos at 1.08% and BTPs at 1.19% – and both just off record intra-day lows.

Credit did very little, but lower corporate bond yields on the back of the rally in the underlying government bonds are going to make sure that month-end total returns are going to be excellent. Close behind in terms of performance will be government bonds, while Eurozone equities have had a good time of it of late too. Oil’s drop from the $50 per barrel area to the mid-$42s will see it as a loser in July, performance-wise.

One session left before we close out Chapter 7 of 12

Performance wise, it has been a good month. In terms of breaking records, it has too. That is, record lows for government and corporate bond yields. And it is not because recovery dynamics have set in. They haven’t. It is because the world continues to face problems around sustainable growth, persistent low inflation, consumers and corporates not spending/investing as economists and politicians would like. There’s more talk about the potential for helicopter money as low and/or negative rates fail to inject much life into a moribund global macro environment. Geopolitics, terrorism, Brexit, US elections and the like only serve to add to the feeling of malaise and a need to retrench.

The DAX index has had a good month, added some 600 points and is now just 450 points off where it started 2016. The FTSE 100 has shrugged off Brexit fears as has the FTSE 250, although helped in no small part by the weakness around sterling. Equities generally have had a good time of it this month. The earnings season has been very mixed, but not too much has fazed us with weakness and strength in areas and sectors of the market pretty much as expected.

In credit, we closed out the session again, drawing a blank in primary – and we’ve had too many sessions for comfort where this has been the case of late. Anyway, spread markets were in stable form, not budging much even on any ECB participation given that “regular” investor interest has faded into the summer sun. In a lacklustre session, Markit iBoxx IG corporate bond index closed at B+127bp (+0.5bp), around 27bp tighter this month and the HY market did very little too, with the index at B+460bp (-1bp). Those moves are noise int he big picture and highlight the lack of activity occurring in the markets for the moment. The iTraxx indices edged higher too, with Main at 70bp and X-Over up at 322bp.

That’s it for this week. As a reminder, we are going to a weekly format, to be published every Tuesday morning during August. Have a good weekend. Back next week.

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.