14th September 2015

Fed up? The wait’s nearly over

MARKET CLOSE:
FTSE 100
6,118, -38
DAX
10,124, -87
S&P 500
1,961, +9
iTraxx Main
71bp
iTraxx X-Over Index
328bp
10 Yr Bund
0.65%
iBoxx Corp IG
B+145.7bp, +2bp 
iBoxx Corp HY Index
B+471bp, +4bp
10 Yr US T-Bond
2.19%

All eyes on the Federal Reserve… The US interest rate decision can’t come fast enough. Many ought to be put out of their misery, one way or another. We’ve been on tenterhooks long enough and the market will be tetchy into it, hopefully relieved after. That’s how it usually plays out – and it probably will again. And that’s because whatever the Fed does, it will most likely be a damp squib, with most of the worrying over and positioning already in place. If it raises, we will likely get a bit of volatility into the end of the week, with some more pondering as to what this might mean for EM, FX markets, equity valuations, US-versus-eurozone asset performance and so on. If it doesn’t, we will still get something of a wobble as we all consider whether it will do it ‘next time’, and give some thought to the idea that the Fed might be behind the curve and need to raise in October or December (perhaps more than 25bp). But once the thinking, writing, comments are all done, we will settle and probably trade higher in most asset classes. Much ado about nothing, so to say. True to form, we closed out Friday with these worries ensuring all erred on the side of caution. Oil futures fell, thought was given to China’s busy weekend of data releases, equities trended lower in Europe, govvies got a better bid and credit was weaker by some margin. Still, we should not be surprised by the market reaction, and for credit it wasn’t a big deal. After all, a couple of borrowers chanced their arms on Friday and got deals away ahead of what could be a busy opening couple of sessions into the Fed’s get-together.

Thank goodness for the primary markets… Because the corporate bond market would be a morose place if the window for issuance was closed: secondary markets are not exactly chock-a-block with liquidity, activity or decent volume. The week just gone was a very good one, with issuance levels higher than most could have reasonably anticipated. According to Dealogic data, Eur206bn has been raised by IG non-financial corporates so far this year (Eur282bn is the record for any given year), and the Eur14bn last week alone makes it the third-best week of 2015, the other two coming back in that mid-Q1 period. On Friday, low triple-B rated ITV slipped in with a Eur650m, 7-year transaction at midswaps+162bp. Italy’s A3/A- rated Eni paid up for 8-year funding at midswaps+105bp, offering a decent 10-15bp new issue premium which was necessary given the weakness in the market in the session and a not so impressive order book of below Eur1.5bn. A quieter period now wouldn’t come amiss, helping us all properly digest last week’s deluge and leaving us to focus on the post-Fed dynamics.

Taking stock with two weeks to go to quarter-end… And corporate bonds are having bit of a soggy time of it lately. IG corporate spreads as measured by the iBoxx index closed out up at B+145.7bp, or +3bp on the week and +2bp in the day. We are creeping higher at the moment, and it doesn’t make for good viewing given that the current index level is some 51bp higher than the Q1 tights. YTD IG returns are now at -1%. That’s not panic, it’s just some repricing in the face of the huge supply. Interest in paper is as strong as ever, witnessed through the demand we are seeing for new issues and the lack of any noticeable outflows from corporate bond funds in Europe. We continue to believe that if pockets of liquidity emerge in fancied bonds, then this is a buying opportunity. In HY, we closed out at B+471bp, +4bp in the session and on the week. The consistent edging wider means we are now just 7bp off the August wides. And it makes for bad viewing that the current HY index level is 100bp off the year’s tightest mark. Returns are up at +1.5% YTD though, which soothes much of the pain. We explain some of the weakness in IG spreads as a repricing impact coming from the fall in stock markets, with returns hit by the rising yield environment given that the underlying has backed up considerably. Copious supply levels of late have also had an impact, but this usually has only a short-term effect on spreads and we think it will blow over as soon as we get several quieter sessions, leaving secondary markets to recover. We have previously forecast that IG spreads can get into the B+120bp area – that’s not impossible into what is usually a decent quarter for the markets through Q4.

And finally, the UK Labour Party has a new left-wing leader, and Chinese data missed on many fronts with fixed-asset investment, factory output and growth in real estate investment all coming in lower than expected. Eurozone inflation (or the lack of it) is out on Wednesday. A weak(er) number and the market will expect an additional policy response from the ECB.

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.