26th November 2015

ECB: The market expects

FTSE 100
6,338, +60
11,170, +236
S&P 500
2,089, unch
iTraxx Main
70.5bp, -2bp
iTraxx X-Over Index
296.5bp, -5bp
10 Yr Bund
iBoxx Corp IG
B+152.1bp, +0.4bp 
iBoxx Corp HY Index
B+480.7bp, +2.7bp
10 Yr US T-Bond

Feast starts earlier than expected… It seems like the Thanksgiving party got started a little early, on the final Wednesday of the month rather than the traditional Thursday. Oh, and on the wrong continent. This was a very strong session for all risk assets. It was like we were in a gluttonous haze. We feasted on a Solvay five-tranche deal, with CRH providing the amuse bouches, and then reports that ECB ‘officials’’ suggestions that the central bank was looking at possible deposit rate cuts (in tiered format) and quite possibly expanding asset purchases (and bundling loans) left us heading home hugely bloated. They’re talking a good game and close to kitchen-sinking it, one would think. The market loved it. Stocks were up at the open anyway, shrugging aside concerns around Russian/Turkish tensions, but moved even higher as the prospect of going cold turkey was pushed somewhere into the future. The ECB dare not disappoint in next week’s meeting: the market expects. The euro fell to $1.058 before edging up back over $1.06, while the DAX was up by more than 2% at the end of the session. Government bond markets got a good bid behind them and the 2-year Bund yield closed at a new all-time low (-0.42%) while the yield curve was negative out to 7 years again. The 10-year yield dropped to 0.47% (with the UST/Bund spread anchored at 176bp). Overall, this was a very positive session and the market has legs to keep going into the second week of December, before we ‘up sticks’ for the Yuletide break

Solvay the way to go… The focus for corporate bond market players was primary – as always. They were not disappointed. The deals today highlighted just how much cash is out there to get invested, and perhaps a level of desperation to get it invested before year-end. Solvay was in the market to get the financing in place for its Cytec acquisition. This took in hybrid funding (issues rated Ba1/BBB-), with a Eur500m in a PNC8.5 (at 5.875%) and Eur500m in PNC5.5 format (at 5.125%), and senior deals (rated Baa2/BBB+) starting with a Eur1bn, 2-year floater at Euribor+82bp. There was a 7-year in there somewhere at midswaps+130bp (Eur750m) and finally a 12-year Eur500m at midswaps+180bp. All the deals were priced well through their initial price talks (15-20bp in the case of the senior issues), but they still offered some 40bp of premium. The combined books were around Eur16bn, with about Eur6.5bn of that interest for the hybrids. Solvay’s a good name, but it is a highly leveraged company in a cyclical industry. However, it’s all about yield. And it gave yield. Getting funding for some Lafarge assets it was purchasing, triple-B rated CRH saw interest of Eur3.5bn for its Eur600m deal priced at midswaps+135bp in an 8-year maturity (flat to the curve), and it did a sterling tranche too in a 14-year maturity (£400m at Gilts+212bp). HSBC was the latest of the banks to issue a green bond.

IG credit returns positive again… The long end was better bid and there was a better feel to the market, but in reality, the focus being on the aforementioned new deals meant that the secondary market was firmly in the back seat. On an index level, spreads edged wider for choice and the market is in need to some cajoling to get secondary up and running. Admittedly, given what we have said about secondary market liquidity, that seems like a tough ask at the moment. The Markit iBoxx index closed at 152.1bp but returns for IG credit were back to 0% YTD having been in negative territory since August and boosted today by the rally in the government bond market. For HY, we were also a touch wider, at B+481bp. iTraxx Main though was better offered, lower, at 70.5bp as was X-Over at 297bp with both boosted by the rise in stocks.

We could do with a fairly quiet Thanksgiving session, if only to take in the Solvay deal. have a good day.

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.