20th May 2016

Fed moves the goalposts

FTSE 100
6,053, -112
9,796, -147
S&P 500
2,040, -8
iTraxx Main
80bp, +2bp
iTraxx X-Over Index
337bp, +8bp
10 Yr Bund
0.17%, unch
iBoxx Corp IG
B+148bp, unch 
iBoxx Corp HY Index
B+503bp, +7bp
10 Yr US T-Bond
1.84%, -1bp

We were sure they wouldn’t do it…

Only a week ago we boldly stated that the Fed would not be raising rates in June. The Fed minutes and knee-jerk market reaction suggest otherwise. Stocks down sharply on higher rates, government bonds selling off, oil prices heading lower and EM assets under fire. The corporate bond market also took a defensive tone – secondary basically shut down, that is – but the new issue market saw deals galore printed, immune or oblivious (or both) to the sell-off in risk around it. This is such a disjointed global economy, where signs that the US economy might be emerging from its multi-year economic stupor (at a very slow pace) have all hands to the pump. Europe remains in the doldrums and very few are convinced that China is going to manage its economy any better than anyone else ever has. Differently yes, but better – no. Japan is simply bust. The Fed threatens to ruin any party if indeed it looks after number one.

The story of the session has to be the extreme reaction of the markets to a possible rate hike in June. Impossible a couple of weeks ago and we think not yet a nailed-on certainty, the market is now thinking it is likely. At the open, stocks took a pummelling as they dropped 1.5% or more, Bund yields backed up another 4bp to 0.20% at the 10-year, and whereas we were looking to test the 5bp all-time low last week, we’re now thinking in terms of whether this back-up is a new buying opportunity. The ECB is still buying (more) after all. For oil, $50 per barrel for Brent just slipped from the bulls’ grasp while the dollar firmed up, giving the ECB some temporary respite. It was all an overreaction of course, the market settled and we saw some recovery – though it all went awry again into the close.

Temporary shifting of the goalposts

Another slew of issuance hit the capital markets, almost ignoring the jitters elsewhere. That’s because LafargeHolcim issued €2bn in a 2-tranche deal (7-year and 12-year) but pulled a longer 20-year offering. move-goalpostsThere will be much said about it and many a headline, but on a day when duration was initially under some pressure on US rate fears, few were going to dare to bid for this longer dated risk. It might only be temporary, but the Fed has moved the goalposts – this deal just got caught up in the shift. The two tranches that did get away were eventually priced just inside IPTs. Eastman Chemical took €500m in 7-year funding some 15bp inside IPT, Svenska Cellulosa also plumped for €500m, while Vivendi issued €1.5bn in 2 tranches in 5-year and 10-year maturities. The low triple-B rated Willis Towers Watson printed €540m in a 6-year maturity. This was cheap for the rating, but they paid up given the nature of the business (insurance broker). Finally, investment group JAB Holdings issued €750m in a 7-year deal.

Apart from the singe-tranche deals of infrequent borrowers JAB/Eastman/Svenska, final pricing wasn’t ratcheted tighter as we have become accustomed to (or expect). Quite clearly, the worsening equity backdrop and souring sentiment on that US rate talk has had an impact. This is one of those occasions where syndicates and issuers don’t want to take any risks and “pay up”, so to say, to get their deals away. The bigger Vivendi and Holcim deals therefore saw minimal tightening into final pricing versus IPTs. Nexans (€250m) and Sanoma Corp (€200m) did it for the HY corporate bond market.

IG non-financial issuance: Top 10 May months

That bunch of deals in IG non-financials took the tally for the month to €37.3bn and within reach of this being the best month of issuance for any May. The best May month to date was 2007 with €38.7bn worth of deals, leaving the current month slipping into second place ahead of the €28.7bn piled up in May 2008 (see chart). The May monthly supply record will come next week given we’re just a borrower or two printing away from it, but unless we get €11bn+ in the week, the all-time monthly record (around €49bn) will stand a little longer. We would expect nothing in the market today as we all reflect on the potential for a rate hike and investors absorb that possibility as well as the plethora of deals issued this week.

Difficult end to the week – for some

Equities took the brunt of the fears around US rates, with the DAX ending 1.5% lower with other bourses off by 1% or more. The S&P was off close on 1% again and at 2,040 is in the red again, year-to-date. Government bond yields had jumped higher earlier in the session only to later recover, the 10-year Bund ended yielding 0.17% and unchanged! The same was seen with the Gilt, left at 1.44%. Oil also did well to recover a little, with prices off over 2% earlier in the day being more like 1% lower into the close. Brent was trading off a $48 handle.

While all that was going on, secondary credit was doing very little. Spreads, as measured by the broad Markit iBoxx IG corporate bond index closed completely unchanged at B+148bp. We shouldn’t be too surprised by this. The corporate bond market, after all, is extremely illiquid. There are few sellers and we know the ECB is about to rock up. Investors were instead focused on the primary market and busy investing their cash. Credit’s weakness was taken through their own liquid proxies, the iTraxx indices. Main ended 2bp higher at 80bp and X-Over at 337bp (+8bp).

Wishing you an uneventful Friday. Back 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.