21st September 2016

Early to bed ahead of FOMC

MARKET CLOSE:
FTSE 100
6,831, +17
DAX
10,394, +20
S&P 500
2,144, +5
iTraxx Main
74bp, New contract roll
iTraxx X-Over Index
341bp, New contract roll
10 Yr Bund
-0.02%, -3bp
iBoxx Corp IG
B+124bp, +1bp 
iBoxx Corp HY Index
B+443bp, +1.5bp
10 Yr US T-Bond
1.69%, -2.5bp

Hands up, baby, hands up…

hands-upHands up if you thought that yesterday saw a pre-Fed flurry of primary corporate bond market activity? After all, it was also Tuesday and usually a heavy day for issuance. All those who put their hands up: wrong.

And it wasn’t down it being iTraxx roll-day for the new contract. There was nothing in IG corporates in euros leaving Toyota in sterling to come unopposed (£500m). Credit Agricole took the opportunity to issues dated subordinated debt (long call, €1bn) and that was it, save for some covered and SSA issuance. We would have expected a flurry of issuance admittedly, given that the pipeline is rammed with borrowers seeking to access the markets. Still, we’ll take a day – or two (because today will be the same) – of consolidation, and to sit and wait it out.

That gives us the opportunity to have a look at where the market sits right now, for corporate bonds. And the readings are good. The returns for IG corporate credit are at 5.6% YTD, 6.5% for HY and 13.5% of sterling. While all those returns are off the highs seen around a month ago, they are still excellent for an asset class usually not used to this level of performance – and one which has, by and large, managed avoid much of the volatility besetting equities and lately government bonds.

That doesn’t mean that spreads have it all their own way. The Markit iBoxx index for IG corporates was 45bp wider at one stage during the pits of the Jan/Feb risk asset meltdown. It has recovered to around B+123bp, some 31bp tighter YTD and we target a level of B+100bp into year-end.

For HY, the index has seen well north of B+660bp but is now tighter at B+441bp – but off a recent low of B+410bp. This market has reacted more to the recent macro weakness (it is a higher beta asset class after all), but given our view that markets are in good shape for the foreseeable future, we still look for somewhere lower than B+400bp by the time we close out 2016.

Sterling has had the best time of it, with the corporate bond index at G+150bp (off a BoE post-QE announcement low of G+141bp) but still 45bp tighter YTD. Returns for this longer duration asset class are up at a stunning 13.5% and off highs seen a couple of weeks ago of 17.2%.

Corporate bonds performance set in stone for 2016

The drivers for corporate bonds and the likelihood that spreads start to tighten again & returns rise again will come from a rise in government bond prices (lower yields) plus central bank buying of corporate bonds. The ECB has taken down over €25bn in 14 weeks and the Bank of England is also getting in on the act, seeking to lift £10bn of a much smaller and more illiquid market.

The is nothing on macro that can derail us – no major uptick on growth or much to see us head materially lower in growth. We’re range-bound in that sense. Rates might head higher in the US – slowly – but they’re heading lower or not moving in the UK/Eurozone. The default rate is stuck below 2% and refinancing risks for the corporate sector (in HY) is de minimis, with the wall of funding (refinancing) still a couple of years away before we need to worry.

That’s not at all to suggest we are complacent, because a shock-event could occur which would impact all asset classes. It’s difficult to position for that “event” by its very definition, but we believe credit will still come out on top from a performance perspective should one occur.

Markets close, expecting no change

Oil was down but that didn't impact equities

Oil was down but that didn’t impact equities

European equities gave up decent gains from earlier int he session to close flattish. Oil prices ended in similar fashion (Brent just under $46 per barrel). However, government bonds regained their mojo, managing some impressive gains. 10-year Bund yields, grappling with a “+/-o.o2%” like handle for several session now, managed to close at -0.02% (-3.5bp) and even the equivalent Gilt was on the up with a 7bp yield decline to 0.80%.

Previous heavy losers like Italian BTPs (1.24%, -6.5bp) and Spanish Bonos (0.98%, -5bp) were big gainers. Monte dei Paschi’s woes on the potential for a postponement of its business plan led to some notable losses for the beleaguered banks debt prices. For good measure, Deutsche’s 6% CoCo was off a couple of points as it got caught in the contagion, at around €74 cash price (and now around €5 off its all time low level).

Still in credit, eDreams Odigeo was to price €425m (at time of writing) and thereby keeping up the charge for the HY market. For the rest, we closed out a little wider in IG and also a touch wider in HY. Index yields were barely changed as the underlying rallied.

That’s it. 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.