26th July 2016

Grinding it out

MARKET CLOSE:
FTSE 100
6,710, -20
DAX
10,198, +51
S&P 500
2,168, -6
iTraxx Main
68bp, -0.5bp
iTraxx X-Over Index
320bp, +1.5bp
10 Yr Bund
-0.04%, -1bp
iBoxx Corp IG
B+126bp, -0.5bp 
iBoxx Corp HY Index
B+458bp, unchanged 
10 Yr US T-Bond
1.56%, -1bp

Mondays are ECB corporate bond day…

ecb-building

Slowdown: The ECB Corporate bond buying programme

It’s all good. Admittedly, it is quieter than what we might like – but there is after all little or no supply to get excited about, nor much by way of macro newsflow to have had us down or upbeat. We did at least get the latest report update from the ECB’s corporate bond buying programme, where into week-6 the lifting of the corporate bond market continued albeit at a slightly slower pace. But it is going to keep spreads on a tightening trend through the summer weeks. How can it not?

There will be no issuance, unlimited demand from the central bank, hardly any liquidity – and so they will squeeze the market much more as a result (in economics it’s called a supply/demand imbalance). The only dynamic keeping the ECB from buying more is the availability of paper. The Market iBoxx IG corporate bond index is currently marked at B+126bp and somewhere around the B+110bp has to be a real possibility of where this index might be when we are back in play come September.

So, six weeks in, and the ECB has amassed €11.85bn of IG non-financial corporate bonds, running at a rate of a touch under €2bn per week. The €1.4bn last week was the smallest weekly grab, and might be a sign of the difficulties they are experiencing in getting their hands on corporate bonds. If they try even harder, the result will be to distort the market in favour of increasing the pace at which spreads will tighten. Admittedly, it is only a week’s data point – and it is early days in the big picture, but we have to think that the low-hanging fruit has been picked, that there is generally a lack of activity and that dealers have probably become more savvy with their offers.

If one or all of the aforementioned ring true, then the ECB will struggle to keep up the €2bn weekly pace they started off with back in June – and kept up for the first month or so. Still, even a €1bn weekly average would be more than twice what we envisaged before the programme started, and we – as well as the market – can only hope that they start to slow to around €500m in due course. After all, if would be helpful to have some juice in the market.

EircomElsewhere in credit, we had just a €200m tap of Eircom’s 2022 issue in the HY market with Ineos expected today in euros and dollars. Just €2.2bn has been printed in the HY market this month, versus an average of almost €5bn per month for the previous three. Senior financial issuance month to date is up at €9.4bn. We now have the FOMC to look forward to come Wednesday and then the bank stress tests on Friday, so we could probably expect little activity into it all. This means the €10,650m of IG non-financial supply will likely see very little added to it and somewhere of the order of €12-13bn tops will close us out this month, should any deal arise.

Sound of the summer

oil that is

Oil dropped to a 3 month low

The market overall was in decent shape again. Equities got off to a fine start, but the rally faded as the session wore on, with only the DAX among the major bourses managing to hang on to a positive performance, while others were just a small down in most cases. Jitters on crude inventory build-ups saw oil on the back foot, with Brent trading off a $44 per barrel handle. It’s been a while since it was down at these levels and all the signs/positioning are that it might be heading lower from here. Bund yields edge lower too, the 10-year left at -0.04% (-1bp) and that after the Ifo business confidence survey in Germany came in beating analyst expectations. Gilts were better offered which saw the 10-year yield edge a touch higher to 0.81% (+2bp).

In the corporate bond market, the iBoxx IG index was lower at B+126bp (-0.5bp) while the index yield fell to a record low of 0.91% (-2bp). Once again, the HY index closed unchanged with little activity going on here despite there being a small tap of the Eircom 22s. The indices closed pretty much unchanged with Main at 68bp and X-Over at 320bp.

On a housekeeping note, during August, we will revert to publishing this note every Tuesday owing to the lower levels of activity during the holiday month – but so we can keep you updated on the ECB’s activities in and around the corporate bond market.

Have a good day, back tomorrow.

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.