9th June 2016

Happenstance, not causality

On issuance volumes, that is…

It is so tempting to put the higher levels of issuance since March down to the ECB announcing its bond buying program. It isn’t. It is a complete coincidence that this has been the case. Logically, why issue before the ECB has lifted a bond? After all, common sense and a bit of perception tells us that yields and spreads go will lower and tighter, that funding costs will too and demand for corporate bond risk will stay elevated while the ECB is lifting the market. The higher levels of issuance since March coincide entirely with the recovery in the markets after a quite depressing opening couple of months of the year. The case has always been that Q1 is usually one of the busiest quarter of the year – any year. Banking budgets are made or busted during this quarter. We always start off with a high level of enthusiasm to go with redemption proceeds and new cash coming into the market looking for deals. The corporate sector has nearly always obliged.

It didn’t this year. Remember, oil fell to $26 per barrel. The DAX at one stage was off 18.5%. Market iBoxx IG corporate index spreads gapped 40bp!!! We fretted about macro, we couldn’t figure out whether or why the US would raise rates. EM was supposedly a busted flush. China was supposedly collapsing. We turned around in late February and now find oil prices have doubled, equities are mostly in the black YTD (the DAX is still down over 4%), credit spreads recovered their 40bp of weakness and are 10bp tighter. Oh yes, and issuance recovered too. We had the correction. All the deals the banks were afraid to bring in January and February (rightly so) flooded the market and we’ve had a few M&A financings to get done too. US corporates have been prevalent because costs are lower here versus in dollars and the now natural demand for risk (ahead) of the ECB has allowed them to get sizeable deals away.

The chart shows the trend since 2013 of quarterly IG non-financial bond issuance. And it shows that the first quarter is usually the heaviest of the year, although that isn’t the case this year because of the poor market conditions of January and February.

Quarterly non-financial IG corporate issuance

ECB starts buying – going to be busy at the checkout

So they’re here. The ECB has started buying and were seen lifting sizes of €2-5m up to maturities of 10-years. They’re going to find it difficult to manage clips on electronic platforms of much more than that given dealer inventories are so low. And that’s going to be a lot of tickets to make it to €2bn a month, which is our expectation of the best they could do. They are, though, vacuuming up much of the remaining liquidity but we can’t see why any investor would want to sell to them, free up cash for new issues and then take their chances of getting the required allocations. So, liquidity in the secondary market is set to worsen, and we believe spreads might just start to crunch tighter given that the ECB will be in the market everyday. There’s no rest for them, and it won’t matter if stocks have a bad day, or if we get some macro volatility that sees some selling from odd investors. The ECB will be there to say “thank you very much, that will do nicely”.

Primary draws another blank

cemex

A €400m deal for Cemex

A case of buy the rumour and sell the fact? The ECB is buying in secondary and many have expected issuers to line up to get deals away (except us, see above). We’re right so far. The day drew another blank for IG non-financial issuance. To us, it makes sense that we get little ECB-inspired issuance, while funding costs were lower in Q1 2015 anyway! We’re not issuing into a “SPV” as such – and it is not as if the European corporate bond market is broken and the ECB is fixing and/or bailing it out. They’re manipulating prices and liquidity and risk taking for their own good (not yours), and meddling where they don’t need to. We believe the right thing for corporates to do is wait, let funding costs fall some more and then if there is a need to get any liquidity on board, pull the trigger. We also believe corporate treasurers can relax knowing full well that the ECB is going to be around for a some time and the case laid out stands for a while yet. The high yield market saw a couple of deals again, with Braas Monier selling €435m and Cemex €400m, both well inside IPTs.

Preoccupation with the central bank makes for a dull day

Away from the ECB, we were left with bit of a dull session. Mind, there was some excitement when the 10-year Bund yield printed at a record low 0.033%, before pushing a little higher in the session to close unchanged at 0.05%. Stocks in Europe were lower, giving back around half of Tuesday’s gains while the story of the day would have been around oil prices. Brent closed at over $52 per barrel exhibiting a remarkable turnaround having seen $26 in the dark days of January. There’s an option-like trade if ever we saw one.

The Markit iBoxx IG corporate index closed at B+143.6bp (-1bp) and the index yield fell to a new year low of 1.23%. That’s 3bp now in the last week ahead of and into the ECB’s interest. In HY, the tightening was 4bp to B+475bp and the yield dropped by the same amount to 4.43%.

Have a good Thursday.

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.