18th Mar 2016

Fed and ECB “steal a” March

MARKET CLOSE:
FTSE 100
6,241, +25
DAX
9,892, -91
S&P 500
2,041, +-13
iTraxx Main
71.5bp, +5.5bp
iTraxx X-Over Index
311bp, -15bp
10 Yr Bund
0.23%, -7bp
iBoxx Corp IG
B+156bp, +1bp 
iBoxx Corp HY Index
B+544bp, +3bp
10 Yr US T-Bond
1.90%, -1bp

The going is good… And we are making hay while that sun shines. Holding off on a rate hike and reducing the prospects of more than two to come in 2016, the Fed effectively added to the stimulus provided by the ECB before it. Central banks (Norges Bank on Thursday) have aided the recovery in risk assets, their combined actions capping off a super week, especially for corporate bond markets. The corporate market is further buoyed on the prospect that the biggest price insensitive buyer is soon to rock up. Supply everywhere – in size, and all kinds of it – to satisfy just about every investor. From single-B to longer maturities, subordinated bank debt of the highest beta and gushes of senior issuance. The paper has been taken down well and the impact on secondary (promoting weakness) has been very limited – less than what we might expect under “normal” conditions. That’s largely due to fear over the manipulative impact of the ECB action later in Q2. You can sometimes get just what you want. Now there are no surprises, as everything ought to be rosy – even if the debt is not ECB-eligible. That’s because there is plentiful demand for bonds and most deals should work. So why the pulled deal from Transurban Queensland? Greed – the borrower asking too much (tight pricing) or an ill-informed treasurer (bankers misjudging investors) seem to be where the blame lies. Anyway, that’s become a minor issue but a good reminder to borrowers and bankers that investors matter – and need to be looked after, not begrudged, if they get some good performance. After all, they’re the ones providing the cash and left holding the risk.

Quieter primary allows deals to be absorbed… It’s important that we got some respite to allow the markets to properly digest the huge volumes printed of late. It allows the market to settle down, but importantly too it stops any potential for weakness in secondary. If performance is good, it sets up investors and borrowers alike for the next flurry of deals. Avoiding indigestion, as we seem to have done, means that we are ready for another potential heavy push next week, with sentiment intact. For Thursday, EDP was the sole investment grade non-financial issuer in the market, with a €600m, 7-year deal at midswaps+215bp (-10bp versus IPT) on books of around €1.3bn. That takes the weekly total to a gluttonous €22bn, while for the month so far it is up at €33bn. High yield issuance of just €1.2bn for the month was added to by the €150m PNC5 hybrid offering from Finland’s Outotec (priced to yield 7.375%), no doubt interesting hedge funds and Nordic retail funds. Financials was a little busier, with deals in senior from NIBC, Santander, Sato Corp and an Aareal Bank tap, with BFCM’s T2 the third such subordinated structure this week.

Back to macro concerns… It was almost as if when we need an excuse to book profits, we cite macro concerns as being the driver. Well, those concerns never left us. We either greet the dovish Fed stance as a relief that borrowing costs are not going higher any time soon, or we fret about the state of the global economy. The relief came into the close of Wednesday’s US session and the open in Europe on Thursday, but we soon faded it and dropped quite markedly. Equities moved lower, the dollar lower and oil lower, while cash credit seemed to decouple from much of the weakness in risk assets and play out in a small range, albeit slightly better offered. Government bonds were better bid. At the close of play, the DAX was off 91 points while the FTSE managed to close a small up. The S&P was 0.7% higher into the close. The euro was up at $1.13 which will concern the ECB. In government bonds, we saw yields crunch lower with the 10-year bund back at 0.23% (-7bp) with Italian and Spanish 10-year yields declining by a similar amount. Credit was a touch weaker leaving the Markit iBoxx index at B+156bp (+1bp) in IG and at B+544bp in HY (+3bp) in a fairly light session. Finally, the synthetic indices were actually on the front foot and outperformed cash with Main lower at 71bp and X-Over 16bp lower at 311bp – but it was just positioning ahead of Monday’s new contract Series 25 roll.

We’re anticipating a quiet Friday. Have a good weekend, back with you on Monday.

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.