- by Suki Mann
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|10 Yr Bund
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|10 Yr US T-Bond
ECB set to become cock o’ the market…
There is much apprehension and expectation as the ECB looks to the corporate bond market to buoy up its already hugely bloated balance sheet. It matters to all in this market, because there is going to be a spread rally and performance boost (great news!), and then much frustration as we compete with a price-insensitive, limitless, cash-rich buyer prepared to muscle its way to becoming king of the corporate bond market.
We discussed previously how much corporate bond debt we believe it could “pragmatically” get its hands on. In a nutshell, the total universe of corporate bonds is approximately €1.55trn, but the pot is whittled down to around €660bn when we take out financial debt and non-eurozone issuer bonds (€826bn minus around, say, 20%). It is clear that the increased €20bn per month of purchases will not all be going into corporate bonds, but what is potentially the mightiest grabfest in corporate bond history might be looking to take a sizeable chunk of the market. It will look at primary too.
What is a reasonable number it could lift in the primary market? Of the €250bn projected non-financial issuance for 2016 (average of the past 4 years), 70% is eligible for purchase (around €175bn of euro-area domiciled corporates) and the ECB could lift, say, 25% if it was aggressive. That implies €45bn of new issuance falling into its hands (which would be €200bn short of its stated goal of an extra €240bn, at €20bn per month), with €205bn left over for third-party investors. At €45bn, that would imply a little under €4bn per month.
Now, the covered bond programme, which is the easiest asset to buy, is averaging approximately €2bn per month and ABS a paltry €290m! So €4bn per month of potential corporate bond buying not only “seems” a high number, it IS a high number – and unachievable, in our view. We believe that €2bn a month in purchases (primary and secondary combined) would be a good effort and about as much as the ECB will reasonably be able to get its hands on. It simply wouldn’t be able to lift more than that without a serious and major distortion of corporate bond market valuations.
However, and rather unfortunately, even that kind of level will be enough to frustrate investors. Also, it will still be enough to manipulate the market in favour of materially lower spreads from here – as we have suggested in previous notes – such is the dire situation around liquidity in the secondary market.
Macro and primary supply bring May to an end
The macro data dump didn’t entice or endear many to add risk or get involved in the market yesterday. Instead, it was easier to focus on performance and the squaring up of positions on the last day of the month. GDP numbers across the Eurozone showed slight increases in revisions, while the region remains stuck in a deflationary rut. Rising oil prices of late might be enough to see the region pull away from deflation at the next reading, but that is small consolation amidst still generally weak demand and investment.
In the US, consumer spending was upbeat, increasing by a more-than-expected 1% in April month-on-month. March house price growth also topped expectations, according to the well-respected Case-Shiller report. The market will be getting a little more nervous on the back of this, regarding a potential rate hike in a couple of weeks’ time. It might all hang on the non-farms report due on Friday this week.
Deals came from ESB, RCI Banque and Thales for a combined €1.95bn, and all were repriced 10-12bp inside the initial guidance. The total for the month, as we close out a very busy one, comes to €44.6bn, leaving May 2016 as the third best month ever for non-financial issuance. That’s an average of €40bn of issuance per month for the last three months, and it makes up for the lighter levels of supply during those more difficult opening months of 2016. In financials, subordinated issuance was prevalent, with T2 deals from La Banque Postale (€500m), Generali (€850m) and HSBC (€1bn), while Credit Suisse issued €1.25bn of senior debt.
Not so mixed as we close out Chapter 5
We closed out the session on the weak side in equities with some acceleration of the drop in Europe as the session progressed. The DAX gave up 0.7% with most other European bourses lower by a similar amount. Oil prices were again nudging $50 per barrel though and stocks in the US closed a little lower but off the session lows. There was a better bid for for government bonds in Europe with Bund yields back down at 0.14% (-3bp) in 10-years. Treasuries closed unchanged although the front-end was better bid. And after all that, credit closed unchanged in a rather uneventful session. Happy June!
Have a good day.