20th October 2016

Draghi front and centre

FTSE 100
7,022, +22
10,646, +14
S&P 500
2,144, +5
iTraxx Main
71bp, -2.5bp
iTraxx X-Over Index
323bp, -9bp
10 Yr Bund
0.03%, -0.5bp
iBoxx Corp IG
B+123.3bp, -0.5bp 
iBoxx Corp HY Index
B+418.8bp, +4.5bp
10 Yr US T-Bond
1.74%, +0.5bp

Cautious tone, but to be expected…


Showtime: ECB press conference today

All being told, we endured a decent session going into the final US Presidential debate and today’s ECB press conference. Equities played out in a very narrow range around zero (small up in the end), while government bonds regained some respectability as prices moved a touch higher leaving yields to head a little lower. Bund yields are closing in on zero again and equivalent 10-year Gilts are heading back to 1%.

Sterling has held above $1.23, putting behind it – for the moment – the excitement/concerns around the flash crash and that drop to the $1.15 level, although it gave way into the close to $1.2270. Corporate bond markets continued to hold steady while the non-financials new issue sector threw up a few deals to keep investors busy.

The news flow was around UK unemployment (rate unchanged at 4.9%) while wage growth was on the up (+2.3%). Morgan Stanley completed the big US banks’ earnings season with an upbeat report in line with the others. Saudi Arabia was in for its blockbuster bond deal – $17.5bn off a $67bn book – everyone has a lot of room for some paper from the Kingdom, while Chinese GDP came in as expected at 6.7%. It might all be a little different though once we have digested that US debate overnight while we await to see what Mario Draghi has to say later this afternoon.

It all points to a fairly limited session ahead, even though few are expecting anything new to emerge from either (likely Clinton to be on the front foot, and no change from the ECB).

On the new issue front, it wasn’t quite that the sluice gates ratcheted open, but we were greeted with deals from Acea for €500m in a 10-year maturity, with Enagas issuing the same amount – and in the same maturity, while UPS plumped for a 12-year deal for €500m. That’s €1.5bn in non-financials for the session to add to the €500m from Snam on Tuesday – but just €2bn for the week so far. It’s not a great amount of supply (an understatement) and we must soon be thinking of a more meaningful follow-through into secondary markets where the grind tighter has been extremely frustrating (currently 0.25-0.5bp a day on a cash index basis).

The ECB’s average weekly lift is hefty €1.8bn after all – just shy of this week’s total IG issuance so far. With little expected today and quite possibly on Friday, these are famine-like conditions for investors looking to the primary markets to get invested.

In financials, Citigroup drove-by for a combined €2.75bn in 7-year and 12-year senior funding while travel group TUI issued €300m in a 5-year deal, becoming the first HY-rated borrower this week. That’s just €2.45bn for the month in issuance so far for the high yield market.

Midweek and no bluster


It was a good day for Brent and WTI prices

So we closed out with European stocks up around 0.3%. Government bonds saw 10-year Gilt yields at 1.08% (unchanged), the 10-year Bund yield at 0.03% (-1bp) and Portugal once again catching the eye as its 10-year debt rallied some more to yield 3.17% – and some 5bp lower in the day.

Oil prices had a good day, up by around 2.5% with WTI closing in on $52 per barrel and Brent some $53 per barrel which came after US oil inventories fell by 5.2m barrels last week, versus market expectations of a rise of over 2m barrels.

In corporate bonds, secondary spread markets closed a little tighter again – what else? Again, it was a grind, another 0.5bp tighter on a broad index basis (Markit iBoxx) for investment grade markets and it seems that this is what we can expect whatever happens elsewhere with other risk assets.

When looking back a month, spreads are pretty much flat, highlighting very moderate weakness into the end of September but a fairly consistent steady grind ever since. Sterling IG markets also edged a touch tighter (-0.25bp) to G+155bp. Spreads in the HY market edged better too – after all, there was little reason for it not too. The iBoxx index was left at B+419bp (-4.5bp) and around 22bp tighter over the past month.

These kind of moves and relative stability suggest that the credit markets have been unfazed by headline risk, any volatility in stocks, heady intraday moves in FX and the sometimes uncertain direction of government bond markets (underlying yields). That has also been the case of late in the high yield market which is usually much more correlated with equity market volatility. The synthetic indices closed with Main at 71bp (-2.5bp) and X-Over much better offered at 323bp (-9bp).

We don’t expect it to be too exciting today. Back tomorrow.

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.