11th October 2016

Happy Mondays

FTSE 100
7,097, +53
10,624, +133
S&P 500
2,164, +10
iTraxx Main
73bp, -1bp
iTraxx X-Over Index
330bp, -3bp
10 Yr Bund
0.05%, +4bp
iBoxx Corp IG
B+124.3bp, -0.3bp 
iBoxx Corp HY Index
B+430bp, -2.6bp
10 Yr US T-Bond
1.72%, unchanged

Feel-good factor back for the moment…

It was a decent day for corporate bond market participants, as primary delivered a few deals and we could afford to worry little about macro. Not that there was much to worry about on macro with a decent amount of news flow veering towards the upside. US stock markets were open but otherwise most were out enjoying their Columbus Day break. Deals were again from utilities and of the transactions this month, only Sodexo has broken the utility strangle-hold on the primary market.

Equities were on the front foot, bond yields were moving higher (Gilts up at 1.02% in 10-years) and oil was easily above $50 per barrel for WTI (closing at $51+). The latter was buoyed by comments attributed to Putin that Russia would possibly agree to capping production along with Opec nations. Only the markets’ current favourite whipping boy – sterling/Gilts were getting the noticeable treatment. Deutsche Bank – and bank stocks in general – were under some early pressure but that subsided as the day wore on.

Government bond yields were edging higher yet again, and the 10-year Bund yield moved to +0.05% (+4bp). It is not quite at the lofty levels seen a couple of weeks ago of +0.10% but it has moved 21bp higher in the last 6-7 sessions (from -0.16%) and now well away from our -0.20% target. The taper tantrum is probably still fresh in the mind for a few, while the day’s news on the potential for a green light on further Greek aid from the Eurogroup as well as an upbeat Eurozone investor confidence report post-Brexit helped risk assets (depressed safe-havens). Portuguese bond prices bucked the trend and on hopes that DBRS would keep the country’s rating in IG territory and the 10-year yield fell 14bp to 3.41%.


A 2-tranche deal from Telefonica

In primary, Spain’s Telefonica issued a 2-tranche deal for a combined €2bn in 4-year and 15-year maturities and is now likely done for the year, with tranches priced just 5-10bp inside initial guidance. Italian utility Snam lifted €1.25bn in 10-year funding and managed to tighten-up final pricing some 15-20bp inside the initial talk. That’s more like it.

Moving north across Europe, Dutch utility TenneT came with a green bond offering of €500m in longer 17-year maturity and just 5bp inside IPT. That’s €3.75bn in the session and compares with €4.45bn for the whole of last week! In financials, CNP Assurances was readying up a rare Tier 3 capital deal.

ECB buying ups the ante – again

After a drop in purchases two weeks ago to around the €1.8bn level (the long-term average), the ECB raised their game last week and took the weekly grab to €2,240m and to €32bn since the bond buying operation began (see chart below, weeks 5-18). As a reminder, that’s €32bn of IG non-financial debt permanently leaving the market – and it is a total which going higher.

The ECB is showing its intentions. We would think that soon enough, more will realise this – and it might just start to have a more definitive and lasting impact on spread direction. Selling bonds means kissing them goodbye forever should they find their way into the ECB’s coffers.

ECB’s weekly corporate bond grab

We did manage to go tighter in spreads last week overall – into some choppier markets elsewhere on macro and single-name event risk, and this might just be a sign that the increasing scarcity of secondary market liquidity is having an impact on valuations. We hope so, as the back-up in yields could do with a counter to keep total returns at these levels. After all, the average ECB lift is beginning to rise (around €1.9bn now) and along with investors looking to get invested before year-end, we might just see a crunch tighter in spreads through this final quarter.

Starting the week on the front foot

That’s more like it. Equities led with gains of 1% or more across Europe and over 0.5% in a reduced session in the US. Secondary corporate spreads moved tighter for choice in IG, with a couple of basis points on the HY index leaving the Markit iBoxx index at B+430bp – but the lowest level in a month. The indices (iTraxx) closed a little lower with Main at 73bp and X-Over at 330bp.

Back tomorrow. 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.