6th September 2016

Keep it up

FTSE 100
6,879, -15
10,672, -12
S&P 500
2,180, +9
iTraxx Main
66.5bp, -0.5bp
iTraxx X-Over Index
309bp, -1bp
10 Yr Bund
-0.05%, -0.05bp
iBoxx Corp IG
B+118.75bp, unchanged 
iBoxx Corp HY Index
B+413bp, -1.75bp
10 Yr US T-Bond
1.60%, unchanged

Not bad, not bad at all…


ECB: We expect more of the same

We have kicked-off September proper in buoyant mood. The macro news flow has been good, especially in the UK. Actually, the UK is enjoying something of a post-brexit bounce with car registrations on the up and the services sector rebounding nicely in August following July’s understandable weakness. Sterling continues to recover ($1.33 – no dollar parity now!) while the market questions the BoE’s judgement around that last rate cut and the new QE measures it enacted. The Eurozone’s own service sector PMI was sullied by some weakness in Germany, but overall the number was in good order.

Stocks were up a little, government bonds roughly unchanged/better bid, credit stable to tighter while oil recovered hard on hope of a Russia/Saudi agreement (only to later fall back some). The ECB is up midweek, but we don’t expect any additional policy action, save for Draghi reiterating the need for vigilance and easy policy for as long as the ECB judges is necessary. It will keep the risk asset rally intact.

It was Monday, and that meant the latest publication of the ECB’s shopping treats. With it – and finally, it should come as no surprise that the big holiday week saw to that the ECB lifted their lowest full weekly totally since the bond purchase programme started 12-weeks ago. Just €1.16bn of IG non-financial corporate bonds were accumulated, taking their 12-week fest to €20.5bn. The previous weekly low was €1.25bn in week to 15 August (publication date). It makes sense that the total dropped as the heavy lifting averaging almost €1.8bn/week up until now was always unsustainable (unless their bid gets ridiculous), in our view.

Weekly ECB corporate bond grab

That sustainability or otherwise of being able to buy say €1.5bn+ might prove to be structurally very difficult. Nevertheless, it is too early to suggest that is the case and whether the holiday period saw to it that they couldn’t get up to the usual average. The weekly average declined a touch but still sits at an impressive €1.7bn.

A Monday in September

The headline might have been around the €1trn that the ECB has taken down since it began its QE programme 18-months ago, but there wasn’t too much going on otherwise. Corporate primary in IG non-financials had just the sole deal from Swedish real estate company Hemso Fastighets for €500m (10-year, rated A-), but it promises to be a busier session today.

Amongst the deals: Aviva

Aviva and BAT tapped the sterling market for a combined amount at a touch over £1bn. Equities were left to trade in a narrow range and at one stage the DAX was within 20 points of getting flat YTD, before it failed to hang on to gains and fell a touch.

In oil, Brent was all cock-a-hoop on news of that potential Russia/Saudi agreement, but with nothing concrete emerging, lost 60% of the initial 5% gain to close our 2% higher at $45 per barrel. As for government bonds, a small bid saw yields generally decline with the 10-year Gilt yield back at 0.70% (-3bp), the equivalent Bund at -0.05% (-1bp) and Spain (Bonos) hovering at around the 1% area (-2bp) even with Rajoy failing to form a new government.

Ain’t no stopping credit, though

Well, sort of.

Spread markets closed unchanged in a lacklustre session but the marginal better bid for government bonds contributed from a total returns perspective. The euro-IG corporate bond index was flat (B+118.75bp) while the Markit iBoxx HY index edged better yet again and yields on that index edged to a new 2016 low of 3.68%. This tells us yet again that the corporate bond market is in good shape.

After all, the default rate is at low levels and event risk, news flow and the like not really suggesting we ought to be concerned. The grind is excruciating! But, admittedly, likely welcome as entry levels are better and that helps all from a returns perspective. The iTraxx indices closed pretty much unchanged at 66.5bp and 309bp, respectively for Main and X-Over.

Have good day, back tomorrow.

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.