- by Suki Mann
|iTraxx X-Over Index
|10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY Index
|10 Yr US T-Bond
Baby steps to recovery… Beggars can’t be choosers, so the saying goes. So we have to be happy with the grind better we are seeing in cash spreads amid little real activity and lacking an event or catalyst to inject some confidence and enthusiasm into the market. We continue to believe that credit is not at a crossroads. It appears however that after a torturous August and September, investors have become extremely cautious and will take some convincing that the corporate bond market still holds its lustre. We will be tighter at year-end versus where we are today, and should be positioned for that. But the gap wider seen a few weeks ago and the demise of a darling of the corporate bond market (VW) have taken their toll. Still, the willingness is there, as the reception for the likes of the Generali subordinated deal showed earlier this week. One swallow (small period of inactivity) doesn’t make a summer (dictate a trend), but maybe the lack of issuance has something to do with there being a new structural dynamic in place now. That is, issuers don’t actually need the funding as ‘desperately’ as we may have been led to believe. We can all make a case for the all-in cost of funding still being very attractive, for deals getting away and the demand for bonds being evident given the high levels of sidelined cash. But many IG borrowers – in Europe anyway – have termed out their obligations, while this year’s supply levels have been bolstered by US-domiciled entities (23% of the total versus an historic average of around 12%, according to Dealogic data). Could it be that European borrowers have had their fill for the moment and can afford to bide their time? We doubt that very much; they are just waiting in the wings.
IG spreads stuck… As measured by the iBoxx corporate bond index, investment- grade spreads have barely moved in the last two weeks. They are seemingly stuck at the B+160bp level, some 50bp wider than where they started the year. Who would have thought that? We had high hopes into Q1, which saw them tighter at B+94bp and heading for a seven handle-like level. All risk assets have come unstuck since then. It’s been worse in HY, but at least we have some greater daily index spread movement. From B+435bp in January to an early Q2 tight of B+371bp, the HY index is now parked around the B+500bp area (the high was around B+570bp). This move and the doldrums the IG market currently finds itself in have choked off the supply pipeline for junk-rated borrowers. Confidence needs to be almost pitch-perfect. Nevertheless, there hasn’t been a major default to stymie confidence and growth hasn’t deviated from its very low current trajectory, though there has been a slight worsening in the upgrade/downgrade ratio. That’s to be expected given the longevity of the current economic downturn. Refinancing risks in the near term however remain limited given the huge financing and terming out of debt we have seen over the last 4-5 years. Still, with US defaults likely on the rise due to the oil sector’s woes, they will probably act as a control valve on spread tightening in Europe. We still look for B+475bp as more likely than B+550bp as the next stop.
After the ECB, the Fed will put a dampener on activity… We could really do away with reasons not to get involved. This week the ECB, thereafter the Fed and month-end dynamics. We have just about a week to go before we see out October, and it is going to be a drab one. Spreads closed unchanged to a touch wider in today’s session, and they have barely moved all week. Yes, a few issues in hybrids might be up a little int he week, Generali’s subordinated deal has elicited much interest and so on. But overall, the session and the week have been reflective of the holiday season (be it the peak of the summer or Yuletide). iBoxx cash IG closed at 160bp or unchanged, and the HY index was at B+501bp (+2bp). For iTraxx, we ought to have had a slight better bias derived from better stocks in Europe, but Main was unchanged at 78bp as was X-Over at 325bp. There was nothing of note in the new issue market.
US stocks closed down, Yahoo numbers disappointed and Thursday’s ECB day, it’s going to be quiet. Quelle…