23rd Feb 2016

Fonejacker

MARKET CLOSE:
FTSE 100
6,038, +88
DAX
9,574, +186
S&P 500
1,946, +28
iTraxx Main
108bp, -5bp
iTraxx X-Over Index
424bp, -21bp
10 Yr Bund
0.17%, -3bp
iBoxx Corp IG
B+186bp, -0.5bp 
iBoxx Corp HY Index
B+638bp, -2bp
10 Yr US T-Bond
1.76%, +2bp

Working harder, but could do better… With less than a week to go before we close out the second month of the year, we can at least be relieved that it’s been a little less fraught than the opening one. It looked bad at one stage, but we seem to have found some kind of floor amid less volatile markets. The problem issues remain, nevertheless, as much as we would like to wish them away. In the corporate bond market, investment grade returns are in the black, but that is about the only real redeeming aspect of the opening skirmishes of 2016 for the asset class. Admittedly, we haven’t really had to contend with too much of the volatility that has hammered stocks on many occasions, but spreads have gapped, supply has been quite shockingly low and liquidity (as we expected) has been extremely poor. As measured by the Markit iBoxx index, IG corporate spreads have widened by an incredible 31bp in the opening 7 weeks of the year, but index yields have declined by 3bp to 1.73%. In the HY market, the index has widened a massive 115bp and yields are up at 6.13% (+85bp). The drama? For credit specifically, it has been around the banking sector impacting the AT1 market (few expected that to be the case, as many were looking to increase financial exposures), commodity-linked names and whether the asset class generally could stand alone in not being repriced versus other assets which were coming under pressure. It couldn’t. The new issue market hasn’t been as bad as it is now for a very long time. The opening months of any year are usually the most prolific. There’s money to be put to work, outflows haven’t materialised in any meaningful way, redemption proceeds are on the sidelines and cash positions are building. Syndicates are afraid or misjudging the mood, borrowers don’t really want to pay up, and it would seem that the only desperate ones are investors looking to add risk from what can be best described as a sputtering primary market. Actually, before Monday’s mammoth Vodafone deal, just around €20bn of supply each from IG non-financials and senior unsecured bank debt, with less that €1.5bn in HY has been effective closure!

Good start to the week… At first it looked like the markets completely ignored the weak eurozone manufacturing and service PMIs and instead focused on oil and the latest IEA report suggesting US shale production will drop quite markedly in 2016/17. Oil prices rose by 5% per barrel. A slightly closer look and we would think that weak PMIs probably led most to believe that additional QE is as certain as it could be. Easier conditions for longer and all that. So up we went. Bad news is good news – again. European stocks jumped by 1.5-2% across the board, and even the potential for Brexit failed to dampen enthusiasm for UK equities – momentum seemingly with the “stay in” camp. Government bonds in Europe were better bid suggesting that expectations of further QE is actually the rising tide lifting all boats. And, just to cap it all off, we had that mega deal from Vodafone to keep the credit markets in the shop window. The 10-year Bund yield fell to 0.17% (-3bp) and is now just 12bp off its record intra-day low achieved 11-months ago. Peripheral yields also declined with 10-year BTPs at 1.52% (-4bp), Bonos at 1.65% (-5bp) although Portuguese yields were unchanged at 3.40%.

Telephone numbers grab the attention… €6,000,000,000 from Vodafone (Baa1/BBB+) with over €20bn of demand, and we were off to a flyer for the week. Four tranches, all €1.25bn – €1.75bn and out to 10.5-year maturities went some way towards satiating the demand for primary corporate bond risk. We added, for good measure, a €500m 10-year from Deutsche Bahn, and that took the total YTD IG non-financial corporate issuance to a more respectable €26bn YTD. With the markets in this mood – looking for QE and with sentiment having flipped from morose to upbeat, we have to expect more from the primary market today and over the next couple of sessions. The feed through into secondary unfortunately was limited with just a small tightening in spreads – the focus was on that Vodafone deal. The Markit iBoxx IG index closed at B+186bp (-0.5bp) and the HY index dropped just 2bp to B+638bp. Small change. CoCos, corporate hybrids and the likes closed close to unchanged, slightly higher (cash price). With stocks up again, it seemed like iTraxx shorts were being closed out. There was a ratchet tighter. iTraxx Main was 5bp lower at 108bp and X-Over at 424bp.

Super Tuesday. 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.