16th November 2015

Fluctuat nec mergitur

MARKET CLOSE:
FTSE 100
6,118, -60
DAX
10,708, -74
S&P 500
2,023, -23
iTraxx Main
74bp, +1.5bp
iTraxx X-Over Index
310bp, +5bp
10 Yr Bund
0.56%
iBoxx Corp IG
B+152.8bp, +1bp 
iBoxx Corp HY Index
B+481bp, +5bp
10 Yr US T-Bond
2.27%

First things first. Our thoughts are with the victims, their families and the people of Paris after the tragic events which occurred at the end of last week. Life is too precious to be lost like this.

On to less important things…

Subliminal? No. Read my lips… The depressing read over the past few days around corporate earnings, the oil glut and drop in prices, inflation or rather the lack of it, global growth and US interest rates all make it sound as though we are sleepwalking into another financial disaster. We are not. All of the aforementioned can be explained away. And we are already used to a world where the higher levels of growth we had previously become accustomed to are not not going to return for a good while yet. So, seven years later, we are still stuck in the doldrums and we most likely will be writing the same “So, 10 years later….”. The situation is all playing into the hands of the corporate bond market. We’ve known and said as much for many years. It’s just that market forces – illiquidity, idiosyncratic risk and at times investor nervousness – have scrubbed out the straight-line tightening and constant positive performance. However, it is quite clear (to us) that everything is once again (or still) falling into the hands of the corporate bond investor. The economic outlook remains bleak, and there will be no return to high levels of sustainable growth. Interest rates are staying low or going lower everywhere – except perhaps in the US. They might eventually have to change course, and they have form in doing so. Corporate profits are falling, which might necessitate a closer look at equity valuations, but balance-sheet integrity is being maintained. And the default rate in Europe is very low and expected to remain so (less than 3% in 2016, we think), while the small increase in the US is nothing to get concerned about. With risk and high levels of volatility around equities, commodities and FX and continued low interest/deposit rates, institutional and retail demand for corporate bonds will stay firmly in place through 2016. It’s that simple.

A mixed bag from the US, but poor eurozone data keep expectations in place… In the US, Friday saw much weaker than expected producer prices (-0.4%), while the University of Michigan consumer sentiment survey was higher than forecast at 93.1. Retail sales grew last month, but again came in significantly lower than expectations. Plenty of fat for the Fed to chew on there. In the eurozone, we closed out with a weak GDP print in Germany, low wage growth levels in France (again) in Q3 and another painful contraction in GDP and output in Finland. Commodity prices remained under pressure and with the IEA reporting a growing oil glut, the lack of demand and continued heavy pumping of oil by the Saudis and others means that global deflationary pressures will persist. Plenty of fat for the ECB council to chew on too.

Friday’s deal flow augers well for this week… Deals from Thermo Fisher and UPS to close out last week are a good sign that we might get higher levels of deal flow this week. The mid/low triple-B rated Thermo Fisher did a slightly increased Eur425m at midswaps+127bp in a 5-year maturity, while UPS was in for a dual tranche funding. A 4-year floater at Euribor+43bp and a Eur700m, 10-year deal at midswaps+75bp were the order of the day for UPS as it raised a combined Eur1.2bn. The counter has the monthly total so far now up at around Eur12bn for non-financial IG issuance. It’s looking like we can double that total by the time November is out.

Demand is evident, but secondary doesn’t show it… The corporate bond market isn’t quite broken, but there is a disconnect between primary and secondary. It’s almost as if we have investors needing bonds and prepared to add in primary knowing – or feeling – that there is upside and that the herd mentality offers them comfort. We’re all in it together. In the meantime, the Street plays “pass the parcel” in secondary, in a throwback to the 80s and 90s, when they could make a market and offer liquidity, and spread moves made sense. Investors are nervous about getting involved via this route… just in case they get it wrong. Someone isn’t smelling the coffee. Anyway, in the month so far, spreads have barely changed, as suggested by the indices. The Markit iBoxx IG corporate index closed last week at B+152.8bp (+1 on Friday), while the HY index was higher at B+481bp. And all the while, primary is going great guns, issues are being decently oversubscribed and new issue premiums rammed tighter. The iTraxx indices moved higher – as one would expect, given where equities were – with Main at 74bp (+1.5bp) and X-Over 5bp wider at 310bp. US stocks closed over 1% lower. The 10-year Treasury yield dropped to 2.27% and the equivalent Bund yield to 0.56%, but more revealing, the 2-year Bund yield was at a record low of 0.38%. Corporate bonds, gotta love ’em. Be confident, credit works.

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.