9th September 2016

Draghi refuses to feed the fish

MARKET CLOSE:
FTSE 100
6,859, +12
DAX
10,675, -78
S&P 500
x,xxx, +-xx
iTraxx Main
65bp, -0.25bp
iTraxx X-Over Index
304.5bp, -1.5bp
10 Yr Bund
-0.07%, +5bp
iBoxx Corp IG
B+118bp, +1bp 
iBoxx Corp HY Index
B+410bp, -4bp
10 Yr US T-Bond
1.61%, +7bp

ECB straight bats it…

Draghi1

Mario Draghi: ECB leaving things to play out for now

It might have been front and centre for Draghi and a market gripped by what might happen…but nothing did! They kept it all unchanged and claimed that more time was needed to allow the current measures to play out. Draghi swerved questions in his press conference around the potential for buying bank debt, preferring to focus on what the ECB is lifting at the moment – and the impact that it is having.

An extension to the current asset-purchase programme was not discussed at the ECB either, nor did they feel the need of further stimulus for the time being. In our view, they are only delaying the inevitable and more stimulus is coming, likely at the end of Q4 or into early Q1.

Growth forecasts were cut by the ECB (2018 to 1.6% from 1.7%), inflation expectations were left broadly unchanged and Draghi maintained the need for structural reform – again (fat chance of that being heard in the various political circles).

Other than that, the session passed by with little excitement and the BoE’s Carney did his best to dampen it some more with a rather downbeat assessment of what and how much the central bank might look to buy in the bond market as part of its QE operation. Overall, they’re looking at buying £100bn and not the £150bn originally envisaged by the market, and the criteria of eligible corporate securities was quite strict (around UK-based operations/employees etc).

Nevertheless, we don’t think it will have too much negative impact in terms of pushing corporate bond spreads wider in any material way (on the back of any market disappointment), but the tightening might be a little more measured from now on. All issues/issuers will generally benefit as there will still be a relative scarcity of bonds to go round to meet the demand.

There was broad disappointment in it all, leaving Gilts to sell-off (10-year yield up at 0.76%, +8bp) and the 10-year Bund yield rose to -0.07% (+5bp). Peripheral government bonds took it on the chin with, in particular, BTPs in 10-years seeing yields up 7.5bp (to 1.15%) and Spanish yields up at 0.99% (+6bp). These will all reverse in due course, in our view. Stocks also took some pain, probably on the lowering of those growth forecasts with little hope on the inflation front. The DAX, up nicely in the morning session, reversed those gains – and gave up some more, to end around 75 points lower and well-off the session lows – but back in the red for the year. Wednesday’s session close on the DAX was the only time it has been in the black in 2016. Oil had a very good day on the back of a massive decline in US crude stocks when the market had been forecasting a stock build for last week, the subsequent near 4% move in Brent catapulting it close to $50 per barrel again.

What next?

Well, the FOMC in a couple of weeks. What else? In between, much going and fringe as to whether they might raise rates or not. Generally though, we have clear run which should give the markets time to reflect on the latest from the ECB while the incoming data will dictate the usual intra-day/daily moves in the various asset classes. For credit, we can expect the primary markets to ramp up issuance now. Non-financial issuance now tops €190bn YTD and €10bn for this month with just a week gone. We don’t think the current run rate will persist – making it a €40bn+ month (although it is not impossible), but can look for €25-30bn by the time we close it out. All said, a €40bn month would have us on track for 2016 exceeding the 2009 yearly total.

Credit ignores the exasperation

We really should not have expected anything from the ECB. The fish didn’t need feeding. They chose not to, and rightly so, we believe. There’s time enough to give us more. So we have had some reversal in government bond markets, equities have been volatile in a narrow range (small up or down so far this week), while credit has steadily edged better for choice amid a welter of supply. Negative yields on “pure” corporate debt was the big newsworthy story but also the longest dated zero coupon IG bond (priced at or around par) to date was also something we need to mull over. The corporate bond market is in good shape though; There’s plenty of cash to put to work, supply is coming – and will come thick and fast, while returns promise to hold up too.

iberdola

Iberdola’s plain vanilla €700m deal was one of few for the day.

That left Iberdrola to come almost unopposed with a plain vanilla €700m deal (green bond), while we also had a senior issue from PartnerRe. The deal of the day though was the hybrid transaction from Telefonica and we would think most of the focus was on this issuer (3.75% yield, Pnc5.5 structure) which saw fit to print €1bn off a €5bn book. And why not?

The sense of being underwhelmed by the inaction from the ECB didn’t carry through into the corporate bond market, from a valuation perspective. We managed to grind out another basis point of gains on the Markit iBoxx index to a new 2016 low of B+118bp. Index yields were off the record lows recorded in Wednesday’s session at 0.83%, purely on the back of the sell-off in the underlying. IG sterling corporate spreads closed the session unchanged, but yields ratcheted higher – no coincidence that Gilts were much higher – to 2.46% (+9bp). As for high yield, the market edged better with the index spread 4bp lower at B+410bp and the yield unchanged at 3.64% for this shorter duration index.

The iTraxx indices closed slightly lower at 65bp (Main) and 304.5bp (X-Over).

That’s it for this week. Have a good weekend, back 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.