31st August 2016

Issue or be damned

MARKET CLOSE:
FTSE 100
6,821, -17
DAX
10,658, +113
S&P 500
2,176, -4
iTraxx Main
67bp, unchanged
iTraxx X-Over Index
307bp, unchanged
10 Yr Bund
-0.09%, -1bp
iBoxx Corp IG
B+120bp, unchanged 
iBoxx Corp HY Index
B+420bp, -1.7bp
10 Yr US T-Bond
1.57%, +1bp

Not wasting any time…

That’s what “we” like to see. Corporate borrowers who are not slow in coming forward. At this moment in time, investors will gorge on them. Following a lull in issuance into the summer holiday period, the markets opened in fine style yesterday.

Evonik,Fahnen, vor der Zentrale in Essen, im Juli 2008, Flagge,

Evonik: 3 tranche deal

Evonik was in with a 3-tranche deal, KPN’s 2-tranches were followed by a benchmark transaction from Coca-Cola and a small deal from CityCon. We’re not sure “benchmark-sized” deals as such matter anymore given that the ECB – a major player in the market now – will be in supporting most of these issues (directly or indirectly).

Anyway, the €5.3bn issued from non-financial corporates in August before yesterday rose to €9.3bn with today’s session to go before we close out August – and €181bn, year-to-date. Other than that, a quieter/steady day had a risk-on tone to it probably coming from squaring up of positions into month-end, but more likely a post-holiday feel-good factor. In the corporate bond market though it was – and will continue to be – business as usual.

Business as usual means spreads continue to tighten. And we’re grinding out that tightening right now. Spreads as measured by the Markit iBoxx index at B+120bp represent a tightening of 34bp this year, and 6bp in August. The index yield is at its record low of 0.83%. Few dare sell here and really have little choice but to hang on their positions. After all, the ECB is permanently taking (at the moment) €1.8bn a week on average of corporate bond debt out of the market, and promises to do so for at least another 10 months.

Add in redemptions, new money flowing into the corporate bond market chasing stellar (past) returns and we find that reducing risk now will be a painful – or costly – trade to reverse. If we see weakness in the cash markets, it will not be “real” in the sense that a flurry of sellers have been spooked by an event and are exiting the market. Our market’s proxy for that weakness will be the iTraxx indices.

There’s no telling how far the cash market has to go. We’re surprised spreads have not tightened more, given the ECB’s involvement. Usually, we would expect a buying effort of this size in such an illiquid market to have a disproportionate spread impact – and it hasn’t. It has been very measured, laborious almost. Still, we remain confident that B+100bp on the index and an index yield of around 0.70% are likely by the time the year is out.

There might be a bump and grind along the road to those targets (Fed raises rates or whatever), but such is the ongoing need for capital preservation and some income in the institutional investor space, that it is difficult to not view the corporate bond market as the asset class for choice, right now.

Omens look good, DAX recovers

daxGerman inflation disappointed and Bunds gained a better bid to leave the 10-year yielding -0.09% (-1bp) giving the usual hope that policy will ease in due course. Additionally, the French economic minister resigned and that might have nudged a few to the safety of government bonds. Eurozone business confidence declined while post-Brexit UK mortgage applications fell hard.

That’s a raft of weaker economic data which suggests that we’re nowhere near breaking away from the current ills besetting the Eurozone/UK economies.  It is also the sort of data which provides fuel for risk assets purely on expectations of continued policy accommodation. “Not too hot, not too cold” – so the saying goes. Small wonder the 100+ point gain in the DAX now sees it 80 or so points away from being flat for the year. Recall, it was down 18% in February and has spent all of 2016 in the red.

Sluice gates rip open

Evonik took €1.9bn in 3 tranches in 4.5, 8 and 12-year funding. CoCa-Cola sold €500m in a 20-year deal while CityCon took €350m in a 10-year deal. KPN finished off a stellar day of IG corporate bond supply with a 2-tranche lift of a combined €1.3bn. All the deals priced 10-20bp inside the initial price talk. Quelle surprise.

In financials, HSBC issued a €2bn senior deal – incredibly becoming the sole senior euro-denominated benchmark for August! There is little reason not to think that we could see another bunch of deals today, ahead of a quieter period come Thursday before the release of the US non-farms report.

But snooze-fest in secondary

The session closed out with equities mainly in the black in Europe and by up to 1% higher – with only the FTSE in the red. Government bonds were better bid and yields fell slightly while credit markets were pretty much unchanged. For instance, the Markit iBoxx index closed at B+120bp – only a touch better bid in the session. There were better buyers but the main focus was on primary it would appear – and that is totally understandable.

As for HY, the market again was slightly better bid, with the Markit iBoxx index down at B+420bp and recording another spread low for the 2016. Negative news flow in this space has been light of late, the ECB’s heavy lifting in IG will see more interest in the sub-investment space (crowding out and yield hogs), and we should see a continued tightening in high yield markets. Really, there is – and has been little to derail the trend for a while. Position into it.

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.