21st June 2016

Lights, camera, action

MARKET CLOSE:
FTSE 100
6,204, +183
DAX
9,962, +361
S&P 500
2,083, +12
iTraxx Main
78bp, -7bp
iTraxx X-Over Index
340bp, -32bp
10 Yr Bund
0.05%, +3bp
iBoxx Corp IG
B+146.5bp, -2.5bp 
iBoxx Corp HY Index
B+498bp, -15bp
10 Yr US T-Bond
1.68%, +7bp

Remain, Friday, rally…

Without getting too political, it feels good. Everyone is richer. Markets have recovered. The vote will never happen again. But we are still in the EU and face all the same problems/issues we did before the vote. The markets have now settled and we can get on with the day-to-day business of finding our way through the global macro mess, the politics of non-reform, pulling a nation back together and tackling the drudgery that comes with being a small player manacled by the EU machine… That could be Friday’s CreditMarketDaily.com opening comment.

We would prefer instead to open with: The British people have decided to leave the EU. Now comes two years of negotiation and some uncertainty but also fantastic opportunity. Yes, the markets have fallen hard, sterling is down in the dumps (no bad thing), Gilt yields have collapsed (no bad thing either in the near term) and stocks have had their usual severe kicking. But come next week, we expect stability, some recovery and correction from this predictable and horrible overreaction – and then excitement and anticipation as we all get back to embracing our new future making this whole “new Brexit thing” work.

remain-or-leave

If we vote to remain in the EU, we dare say that there there will be another session like the one we saw yesterday – then things will go back to normal, quickly. We had a taster of what Friday’s session potentially could look like after polls over the weekend showed that the Remain camp had pulled level with the Leave side, thereby giving hopes to the market that the status quo come then will be maintained. A fair chunk of the nervous losses over the previous week were recovered double quick. Those safe-haven positions didn’t look so great with the 10-year Gilt yield up at 1.24% (+9bp in the session, remember is saw an intraday low of 1.07% on Thursday last week), while the equivalent Bund yield was up at 0.05% (off that -0.038% low) and even the US

Treasury jumped to 1.68%. That 1.52% 4-year low from last week now a distant memory! Even sterling rocketed higher recovering all its ‘Brexit fear’-instilled losses versus the dollar. Lest we forget equites where the DAX being down 12% YTD mid-way through past week, is now just 7.5% lower YTD. The FTSE is back in the black.

We’re all jumping the gun though

In Italy, the 5-Star movement made some serious headway with Mayoral wins in Rome and Turin, the latter completely unexpected. This highlights the level of (and growing) discontent across parts of Europe with the ruling elite. Still, the markets chose to go with the flow and we saw BTPs offer up bit of a rally as the 10-year yield fell to 1.40% (-6bp) more, we think, on the Brexit relief-correction rather than the election results in Italy as the market was in risk-on mode for the session. The risk-on saw German stocks up by a quite euphoric 3.4%, the FTSE gained over 3% and in the US, we had the S&P higher by 0.6%. Oil had a good day too, with Brent back up and through $50 per barrel.

The iTraxx indices, credit’s own market risk proxies, had been under pressure of late as risk assets came under fire – but managed to use this session to claw back some losses as the cost of protection declined markedly. Main was a massive 7bp lower and X-Over some 32bp lower to close at 80bp and 340bp, respectively.

ECB grabfest impresses, but they’re killing the market

Well, the data released by the ECB shows that since June 8, they have managed to acquire €2.25bn of corporate bonds. We believe that’s in effectively 6 sessions of activity and if they carry on at this rate, they will have acquired some €75bn of corporate bonds (just over 10% of the eligible universe of bonds) in a 12-month period. That would be €6.25bn of bonds per month and blast out of the water our €2bn of predictions per month. Last week’s moderate weakness in corporate bond spreads is not going to last, and we have to expect that this level of activity by the ECB is soon going to see corporate bond spreads crunch tighter.

Remember, these bonds will never resurface as the ECB will hold to maturity. And soon, investors will realise it. So if investors sell, they’re not going to get the bonds back, given that the ECB’s activity is only one-way. So be ready to kiss anything you sell goodbye. Eventually, we believe that reluctant sellers are going to mean that the ECB will need to get more aggressive in bidding for paper if the central bank wishes to maintain a high level of activity. The only hope is that the current rate of purchases will slow as the July/August holiday period approaches and they’re piling-in ahead of it.

Primary still splutters

Christian Dior

Sole borrower: Christian Dior with just €350m

Christian Dior was the only borrower in the market with a measly €350m offering, with the 5-year issue priced some 18bp inside initial guidance (on a book of €2bn). Soon enough there will be a realisation that cheap guidance is going to be unnecessary as the ECB will usually be there to make sure everything goes swimmingly well. The deal takes us through the €10bn barrier MTD for IG non-financial corporate issuance. The market drew a blank elsewhere as the pattern of last week’s poor issuance levels continued.

And finally, cash markets were also better bid and the better tone everywhere else saw to it that spreads were tighter across the board in the session. The Markit iBoxx IG corporate index was better at B+146.5bp (-2.5bp) and after some considerable weakness over the past week or so, the greater correlation with equities saw the high yield market in better shape too. There was no major uptick in activity, but few wasted the opportunity to mark spreads much tighter. This index closed at B+498bp (-15bp).

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.