23rd September 2016

A gift from above

MARKET CLOSE:
FTSE 100
6,911, +77
DAX
10,674, +238
S&P 500
2,177, +14
iTraxx Main
70bp, -3bp
iTraxx X-Over Index
326bp, -15bp
10 Yr Bund
-0.10%, -10bp
iBoxx Corp IG
B+xxxbp, +-xbp 
iBoxx Corp HY Index
B+438bp, +3bp
10 Yr US T-Bond
1.62%, -3bp

Free for six weeks…

No change there, then

No change from the Fed, but 3 out of the 10 voted for a quarter point rise

So that’s that then. We’ve got a clear run until the next one on 8 November. There will be quite a few economic data points to manoeuvre until that next FOMC meeting, but risk-asset pricing ought to get some momentum behind it. There was little in addition to talk about regarding the lack of a move – such an anticlimax it was, after having previously injected much volatility into the market. And we didn’t waste anytime on it, with equities and government bonds enjoying a good session yesterday.

It was as if all the angst that came with the potential for a rate hike (whatever futures markets were telling us) – which manifested itself in massive volatility and several days of weakness a week ago – was reversed in a few hours. Notably, the German 10-year Bund yield was down at -0.10% from 0.00%! As a reminder, we wrote a week ago, that we thought that the 10-year Bund yield would see -0.20% before it saw +0.20%.

As surprising as that 10bp drop in the Bund yield was, there was nothing from the primary IG non-financial market. Equities followed the overnight rise in the US, moving some 2% or more higher in most European markets. Government bond prices rose and, as mentioned above, yields fell – hard. That was the story of the day.

As well as that 10-year Bund yield, “10” was the day’s magic number. The equivalent 10-year Gilt yield dropped to 0.70% (-10bp) while the periphery wasn’t out-gunned, with Spain almost back at historic lows at 0.91% (Bonos, -8bp) and BTP yields dropped to 1.19% (-9bp). Oil also joined in, with Brent up at $47.6 per barrel. These kind of moves are going to re-add some serious juice to corporate bond returns where the confidence in risk assets is going to have an obvious impact on spread tightening – we hope, because that has not been the case for over a week now.

These kind of big market moves also suggest that the macro outlook is bleak and the recovery dynamic is still far away; that inflation isn’t picking up, industry is in dire straits and consumption growth – or any growth for that matter – is continuing to elude us. Trouble ahead? Or just a relief trade and investor positions getting back to being long duration – and playing into the hands of a market-manipulating ECB?

Primary stumbles for non-financial corporates

It’s been a poor week in this sector with just €1.5bn printed from two borrowers (DSM and Celanese US). Talk (from us included) of €35bn+ for the month – having had almost €20bn issued before this week began – is no more. At this rate we’ll be lucky if €30bn gets done by the time the month is out at the end of next week. The pipeline, we know, is very good and issuers have been on the road of late.

A flurry next week is very likely, especially into the lower yield environment (lower cost of funding), where issuers must be thanking their lucky stars at the fortune (saving) that’s just come their way. €10bn of non-financial IG issuance would do nicely.

In yesterday’s session we did have around €3bn in senior bank funding, but there’s little story around the issuance there. HY drew an uncharacteristic blank after a week or so of relatively buoyant primary activity.

And what about the corporate bond market?

Well. A little wider for choice but returns rocketing, given the rally in the underlying. The latter is the only positive we can glean from it. We’re a little flummoxed as to why we keep edging wider given either the better tone and/or the constant lifting of bonds by the ECB. The Markit iBoxx index closed at B+124bp (+0.5bp) and although just a touch weaker, we are 8bp off the year’s tights seen just nine trading sessions ago. We would not have expected that at all.

Still, the better equity backdrop would have helped higher beta credit and the HY market was better bid for choice, the cash index at B+438bp (-2.75bp) in the session, and those tracking returns on a daily basis would have been comforted by the day’s effort as the index yield fell 9bp to 3.90%. The Sterling corporate bond market closed unchanged in spread, but the index yield was also 9bp lower and returns up at almost 15% YTD – at the flick of a switch (or just a Fed gathering). The iTraxx indices closed materially better, Main at just under 70bp and X-Over 15bp lower at 326bp.

That’s it. Have a good day. Back 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.