30th September 2016

End of third term

FTSE 100
6,919, +70
10,406, -32
S&P 500
2,151, -20
iTraxx Main
73bp, unchanged
iTraxx X-Over Index
332bp, -1bp
10 Yr Bund
-0.12%, +3bp
iBoxx Corp IG
B+126bp, unchanged
iBoxx Corp HY Index
B+443bp, -5bp
10 Yr US T-Bond
1.56%, -1bp

Not bad, but could do better…

autumn-leavesFor IG corporate bond markets, from a performance perspective, it’s best that we look at the year to date effort rather than only September’s. The month has not necessarily been kind to the corporate bond market although we have managed to eke out some positive performance from a total return perspective (because government bonds have rallied).

Spreads on an index basis have widened 6bp in the month, and leads us to a little head scratching as to why. It comes, after all, when the ECB will have lifted around €10bn worth of corporate bonds alone – and mostly in secondary. Admittedly, macro has been volatile around that Fed meeting and the Deutsche Bank story isn’t going away, but the level of interest in the corporate bond market has not dimmed.

The ECB’s effort alone ought to have been enough to sustain a spread tightening environment – so it seems we’re missing something in the “moderate” supply/”high” demand/”poor” liquidity relationship to explain away the ills of the weakness in spreads.

Clearly, the ECB is the biggest player in town in secondary, and “traditional” bond market investors are likely using the primary route as their preferred avenue to get some corporate bond risk on board – hence the consistently good demand for new deals and the now customary and usually given 10-20bp tightening in prices versus initial guidance. It’s a funny old game.

IG credit has been stuck at or around the 6% level and to push on from here, we really do need spreads to start to tighten a little more consistently, if not aggressively. For some, it’s no bad thing they are not as entry levels remain more attractive than they otherwise would be. With government bond performance upside likely a little more difficult to foresee, additional returns to push us closer to 7% will come from spreads tightening by some margin through the final quarter.

We concede that our bullish expectations of the Markit iBoxx index to get to B+100bp by year-end from B+126bp just isn’t going to happen. Admittedly, anything near 6% for IG credit would represent an excellent return for any year; while 7.5%+ in HY would offer the same satisfaction. We’re just getting greedy.

Primary’s last hurrah this quarter?

There was no holding back the primary new issue markets. Total SA followed EnBW’s hybrid with a couple of their own in PerpNC6.6 and PerpNC10 format for a combined €2.5bn, and both were priced well inside guidance with investors attracted to the higher yielding nature of the product from a quality borrower (rated Aa3/A+ senior; A2/A- for the hybrid).

Lanxess’ flagged deals from Wednesday saw light in the session too and the company lifted a combined €1bn in 5 and 10-year funding, with both tranches 15-20bp inside initial guidance. Amadeus Capital rounded off a good session for IG issuance with a €500m deal. The €4bn total for the day translates to €7.6bn for the week and €29.2bn this month in euro-denominated IG non-financial corporate debt supply.  We expect little or nothing in today’s final session for September.

So that we had something for everyone, Schoeller Allibert printed €210m for the HY market.

The sterling markets were also in buoyant mood with deals from Deutsche Telekom (£300m) and Northumbrian Water (£300m) in IG, and Virgin Media in the high yield sector (£350m). Financials saw Shaftesbury Carnaby print £285m, Jerrold Finco £375m and Cabot Financial £350m rounding off a very busy day. The surprise (for us) this month has been the high level of issuance in the sterling market with spreads just edging a little wider (+3bp on an index basis) – and the BoE has only just started its own corporate QE exercise, while returns sit at over 15% YTD.

Mixed session to close us out


Seeing red: The Deutscher Aktienindex closed down

The economic data was mixed leaving us with some food for thought from positioning aspect as we head into Q4. German inflation was perky, Q2 growth in the US was revised higher (to 1.4% from 1.1%) while US homes sales disappointed. Oil held firm eventually having toyed with being a small down earlier in the session. The DAX gave up some good earlier gains (nerves around Deutsche Bank and perhaps Commerzbank) to close firmly in the red while most other bourses were a little up/down.

Government bond markets saw some profit taking (we think) although the economic data didn’t really suggest that we’re in the throes of a turnaround. Month-end/new quarter positioning might have also had an impact on the market. 10-year Bund yields were up at -0.12% (+3bp) and the equivalent Gilt at 0.72% (+4bp) in the session, and where we think these losses will be reversed after overnight weakness in US stocks on concerns around Deutsche (again).

Investment grade credit closed unchanged with spreads at B+126bp (Markit iBoxx index) while high yield risk was slightly better bid, with the index closing at B+443bp (-5bp). The iTraxx indices ended the session pretty much unchanged.

And finally, it’s all about Deutsche Bank, and the market smells a rat.

Have a good weekend, back again in October!

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.