8th October 2015

Grinding

MARKET CLOSE:
FTSE 100
6,336, +10
DAX
9,970, +68
S&P 500
1,996, +16
iTraxx Main
83bp, -1.5bp
iTraxx X-Over Index
340bp, -3bp
10 Yr Bund
0.59
iBoxx Corp IG
B+162.4bp, -3.4bp 
iBoxx Corp HY Index
B+516.6bp, -9bp
10 Yr US T-Bond
2.07%

Primary struggles to get going… October usually averages around Eur15bn in IG non-financial corporate supply, according to data compiled by Dealogic, but we’re unlikely going to get anywhere near that unless some of the current headwinds subside quickly. This month so far has seen just two offerings, totalling Eur700m, illustrating the cautious nature of issuers and perhaps investors, but also the difficult market conditions (volatility, event risk, macro outlook). In a head-scratching sense, despite all the morbid-like headlines, the demand for paper is actually there, but the price to get a new deal away might be too much for some borrowers. That is, deals which come will need to have good premiums (IPTs anyway) – too embarrassingly high, we suspect, for some of the more distinguished/frequent/bluechip borrowers. And no one will want a deal that doesn’t work, while few will want to be seen as being needy of funding – desperate, in other words. Anyway, that can change very quickly and despite another better and quite strong risk-on session today, there was only Deutsche Bahn on the screens with a non-benchmark print. In all, this lower level of issuance is already starting to act as a driver for some performance in secondary, and we need that given the tumultuous period of weakness through September. For HY, the period since May has been very difficult, with very low levels of issuance, and while we are at Eur45bn YTD, getting close to Eur50bn might prove to be a tough ask.

Euro denominated monthly issuance 2015 (Dealogic data)

Illiquid markets helping market gap tighter… It was going so well, with stocks smartly higher and credit much tighter. It felt like Q1 all over again. With no primary to hinder secondary levels, everything was marked better and lack of dealer inventory or just dealers not wanting to let inventory go saw spreads ratchet tighter. This strong session for spread product has come much quicker than we envisaged. Demand for risk was back and suddenly it felt like credit was worth its weight in gold again. Corporate hybrids caught a good bid into it, with prices up a point or more – including VW, which was actually the outperformer. Most other paper rallied into it, while some of the laggards included the likes of Renault and Ford paper. All that might be short-lived, however, given that European equities finished only a touch higher into the close after being up over 1% for much of the session.

Omens looking good but we need to sustain it… Equities always play a large part in terms of sustaining confidence for all risk assets and so it’s important they can hold firm or rise. For the most part in Europe today they did and while US stocks were choppy, they managed to close up (S&P +0.8%). Using the broad measure for corporate bond valuations, the iBoxx index, the IG corporate credit index closed at B+162.4bp, or -10bp from the two-year high we saw only a week ago and 4bp in the session. That’s a healthy rally, with CoCos and corporate hybrids – the two higher-beta sectors – leading the charge better. And that’s despite there still being a sizeable BHP hybrid new issue in the works. In HY, the index was tighter by 9bp at B+516.9bp, or some 35bp tighter than the multi-year wides of last week.

On a housekeeping note, our latest anonymous poll asks our real money readers how they’re positioned for the final quarter. Vote now.

A Thursday in October, 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.