18th November 2015

Fortune will favour the brave

MARKET CLOSE:
FTSE 100
6,269, +122
DAX
10,971, +258
S&P 500
2,050, -3
iTraxx Main
71bp, -3.5bp
iTraxx X-Over Index
297bp,-17bp
10 Yr Bund
0.52%
iBoxx Corp IG
B+152.8bp, -0.5bp 
iBoxx Corp HY Index
B+481.5bp, -2bp
10 Yr US T-Bond
2.26%

Time to show some flair… The UK remains in deflation, China warns on an increasingly difficult external demand environment, oil goes up and down by a dollar or two in the same session but is at multi-year lows while stocks go through the roof. Government bond yields in the eurozone are unchanged but showing a growing divergence with the US, yet the corporate bond market is languishing. We don’t get it. All the tea leaves are well-aligned for corporates being the fixed income asset of choice. Low levels of economic growth for longer, low rates for an extended period, low yields for an age and a supportive default and rating transmission rate all lead to the corporate bond market. And we all know the demand is there. It’s time to move away from the herd mentality of investing and add some more risk through the secondary market, liquidity permitting (and it will be, if one picks and chooses one’s bonds and moment). The new issue market is not really going to be your friend, such is the demand for paper through this avenue; nor will it necessarily be the most efficient way in which to get some. Deals being oversubscribed 3-6x means that disappointment will be there for everyone, large investors and small, as allocations are scaled back. Spreads have barely moved this month – in fact they have edged a touch wider. We think it’s time to stick our heads above the parapet and start looking a little harder into the opportunities that the secondary market presents.

Deal flow picks up, secondary still muted… US-based Magna International tapped the markets for Eur550m at midswaps+127bp in 8-year funding. German-based REIT Alstria came with a cheap Eur500m deal at midswaps+205bp, while shipping group AP Moeller was funding in 7-years at midswaps+110bp, taking Eur600m in the process. There was just a Eur1bn book on the Moeller deal. The deal total MTD with this trio of transactions is up to a little under Eur15bn now. Not to be left out, Mondelez gave something to sterling investors with a 20-year deal. The rest came from banks, covered bonds and other SSA deals. We’ve had to wait a while, but it was a good day on the primary front.

Stocks rocket, the UST-Bund spreads sees a new record… Better than expected earnings from Wal-Mart and Home Depot alongside a pick-up in consumer prices (+0.2% in October) boosted equities in the US, while helping promote bit of a sell-off in USTs. Over here, stocks were already in the ascendancy after the previous sessions’ gains in the US, and managed gains of 2-2.5% on most bourses. The Bund sell-off was contained, leaving the UST-Bund spread at around 175bp. The euro fell to $1.06. In the spread markets, we had a slightly better day again, but it was relatively quiet once again. To close, the Markit iBoxx IG corporate index was left slightly lower at B+152.8bp as was the HY index at 481.5bp. Main and X-Over fell too, were better offered, with Main at 71.5bp and X-Over 17bp lower versus the previous close at 297bp.

Have a good Wednesday.

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.