1st October 2015

It can’t get any worse

MARKET CLOSE:
FTSE 100
6,062, +152
DAX
9,660, +210
S&P 500
1,920, +35
iTraxx Main
89.75bp, -1.25bp
iTraxx X-Over Index
373bp, -10bp
10 Yr Bund
0.59%
iBoxx Corp IG
B+170.3bp, -1.7bp 
iBoxx Corp HY Index
B+551bp, unch
10 Yr US T-Bond
2.04%

Let’s hope Q4 is better… The third quarter was bit of a shocker and has left us all in a daze. Who would have thought that corporate bond spreads would come under so much pressure? The corporate bond market had, after all, assumed safe-haven like status to justify those solid debt (servicing) characteristics. As measured by the iBoxx corporate index, IG spreads were 25bp wider in the month, HY some 90bp and returns negative across the board (monthly and YTD). These moves represent the worst monthly spread weakness in an age! Unfortunately, it might be a while before we see a significant recovery. After all, there are some big ill winds that are blowing nobody any good. The Fed is undecided still, Chinese growth fears are escalating and one of the darlings of German industrial might is embroiled in scandal along with giants like Glencore, in existential crisis given the severe equity and debt price moves. Have the markets really been so taut with anxiety as to expect that the rising tide on the back of easy money could always sustain undeserved valuations? They must have been, but we never really believed it; we all just went with the flow. It worked for several years. The money came in, there were performance and management fees to justify, everyone else was doing it, so why not? Flippancy aside, there has been much anxiety of late given that the low-hanging fruit had been picked and it was always difficult to see what could help credit markets, for example, rally further. The sheer volume of cash coming into the corporate bond market, looking for investment in a higher-yielding, safe, fixed-income asset and the lack of a credible alternative was and is the driver. Now, with the back-up in valuations we have seen, we need to start again. The offered-side liquidity can be found. The problem is, who is going first?

Poor liquidity begets poor liquidity… Poor secondary market liquidity has been a developing feature of this longstanding financial crisis, coming as a result of the almost hysterical and ill-thought political and regulatory response to it (see previous notes). There was a time when we would panic or rejoice at, say, the DAX moving +/-200 points (+/- 2-3%) in a session. Not any more. It’s become the norm. We just trawl the news for the headline, but we also know that this size of move is predicated on much lower flows than the number ought to otherwise suggest. Anyway, the DAX was up over 200 points today and the headline was around the eurozone being in deflation again, meaning that the market now expects the ECB to increase its QE programme, putting even easier money on the table. It also meant a better close for this month as positions were squared (short covering). Credit followed suit and we saw some price recovery across the board.

Big move in equities, subdued in credit… We closed out September with 2%+like moves in most equities. The corporate bond market didn’t quite register the same kind of elation. Naturally, we saw some recovery in VW, Glencore and others which were down and out in previous sessions. Likely a mix of short covering, opportunistic adds, some bottom-fishing and reloading ahead of the new quarter. VW cash might have got 50bp back and its 5-year CDS 20bp (to 270bp mid), but that’s only a small consolation. The flows were mixed and probably for better sellers into an improved, decent bid and returning liquidity. The moves were generally more measured, and +/-1-2bp across low and high beta risk is little to get warmed up around. Corporate hybrids were better too, with VW leading the way albeit off very distressed levels. Noise. The iBoxx IG corporate bond index closed at B+170.3bp (-1.7bp), but that’s 20bp wider this month. The HY index closed unchanged and that would not have been the case normally when stocks rally so much. In synthetics we only inched better too, with S24 iTraxx Main at 89.75bp (-1.25bp) and X-Over at 373bp (-10bp). Again, quite unusual.

Don’t expect too much today, the focus will be on Friday’s payrolls.

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.