13th April 2016

Locking in future losses

FTSE 100
6,242, +42
9,761, +78
S&P 500
2,062, +20
iTraxx Main
77bp, -1bp
iTraxx X-Over Index
329bp, -3bp
10 Yr Bund
0.16%, +5bp
iBoxx Corp IG
B+150bp, +unch 
iBoxx Corp HY Index
B+524bp, -6bp
10 Yr US T-Bond
1.78%, +5bp

Technical market develops amid manipulative policy…

The European corporate credit bond market has become very technical. While we are not quite doing away with the notion of risk anymore, the market is certainly behaving (or believing) that “the risks” are remote. Rightly so for the moment as we position for further high/low beta compression. It’s been a while since we were even concerned about break-even. With spreads tight and still grinding tighter, it leaves little room for error – or for a broad unwind, which we believe can only come if we achieve sustained economic growth at above average levels. It’s also been several weeks that we have fretted about the dynamics of too much supply seeing weaker spreads, or where perceived value might be.

ECB: Great marketing

ECBActually, it’s all come about since that last ECB meeting. Cash credit has displayed little or no volatility while credit’s “real” market might now have become the synthetic iTraxx indices. IG cash has tightened 5bp on an index basis in the last month while the new Series 25 Main has widened 7bp. X-Over is up 34bp in the same period while the HY Markit iBoxx index is 8bp tighter. That is, the synthetics are liquid and macro risk proxies for sentiment in credit ( as well as a hedging and/or overlay tool), while cash has become an illiquid income generator, displaying some sort of tangible “must have” product dynamic. The marketing by the ECB, that is, has been fantastic for the corporate bond market. We probably are locking-in future losses, but that’s for another day – or year.

The news flow for the session was around the surprisingly better-than-expected inflation prints in the UK and Sweden for March. We had the Italian banking sector all cock-a-hoop around the “bad bank” plans for Italian distressed lenders and non-performing loans – before a spectacular reversal in the afternoon session. Oops. Oil, though, was on a high after several voices aired thoughts on the production freeze and that prices ‘couldn’t stay this low for too long’. The US shale gas entrepreneurs will be watching closely as the rig count drops precipitously and idle rigs will be ready to rock back into action.

Demand remains insatiable, nevertheless


Gas Natural took €600m

SSAs and covered bonds dominated the primary market scene, but we did have three IG non-financial borrowers sneak in. Spain’s Gas Natural took €600m in 10-year funding at midswaps+75bp – and 15bp inside initial guidance. Germany’s Linde clipped €750m in 12-year funding at midswaps+40bp (also 15bp inside IPT) while Deutsche Telekom lifted €500m in 5-year funding. That’s now a stellar €17.85bn for the month to date.

By the middle of next week, we could well be looking at this April already being the heaviest such month for new issuance (€26.7bn previous high). And we would still have almost two weeks to go before we close out the month. There was nothing in HY or in the senior banking sector.

April IG non-financial corp issuance – Record in sight

No spectacular risk-on.. or risk-off, just somewhere in the middle

Equities were treading water for most of the session, afraid almost to rally while there was little also to get necessarily nervous about. The late rally in European stocks eventually came on the back of a US equity market rally as oil prices saw fresh 2016 highs. Government bonds – typical safe haven investments – sold off a little (profit taking?) amid that heavy SSA issuance. The 10-year Bund yield has now doubled to 0.15% having seen 0.079% intraday earlier this week! The demand for the long-dated (20-year and 50-year) French government bonds saw combined books at €20bn. The 50-year bond was priced to yield around 1.90% amid those very high levels of demand – and becomes another case of investors locking in future losses. Desperation.

Brent visited $45 per barrel and WTI was up at $42. Brent was down at $26 per barrel a couple of months ago. Some trade that has been. The IMF was busy. The organisation reduced its global  growth outlook for 2016 to 3.2% and to 3.5% in 2017, shaving 20bp and 10bp off their previous expectations made in January respectively, while warning on the potential havoc a Brexit could bring to regional and global stability, trade flows and growth. All rather a case of stating the obvious.

In credit, the secondary market was fairly subdued and price action very limited. The Markit iBoxx index for IG corporates closed unchanged while the HY index was 6bp tighter, likely on returning equity confidence with which this sector is closely correlated. The indices closed slightly lower. The strong close in the US ought to follow through into today’s session as we open for business.

That’s it for today. 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.