19th Oct 2015

Missing supply worthy of a Christie novel

MARKET CLOSE:
FTSE 100
6,378, +39
DAX
10,104, +40
S&P 500
2,033, +9
iTraxx Main
79.5bp, -1.5bp
iTraxx X-Over Index
332bp, -7bp
10 Yr Bund
0.55%
iBoxx Corp IG
B+160.4bp, unch 
iBoxx Corp HY Index
B+506bp, -3.5bp
10 Yr US T-Bond
2.03%

The curious case of the missing borrowers… Where have they all gone? This is one for Hercule Poirot; we’re all scratching our heads about it. The background has admittedly been awful of late: there’s been much spread weakness amid volatile but lower stocks from fears of a sustained Chinese slowdown, Fed rate uncertainty and some major idiosyncratic event risk in the form of Glencore and VW. That has infected the whole market. However, investors now have a more defensive position holding high cash balances, while spreads have started to recover their poise in the face of a lack of supply, poor secondary market liquidity and ever-increasing odds that the Fed will not act later this month. The window is open for borrowers, as evidenced by the decent receptivity to recent deals – very good in the case of the cheap BHP offerings. So with much funding still to get done, where are they all? We’d have thought the sluice gates would have ratcheted open, leading to a gush of issuance – and that might still be the case. With just Eur6bn done this month in IG non-financials, there is room to capture the market without too much competition. There is no real conclusion, except could it be that costs are just too high at the moment? Borrowers do not want to put deals on the screen with too high a new issue premium (for fear of being laughed at?), while investors have plenty of cash to put to work but are looking for the no-brainer deal (and there is never a no-brainer deal).

Duration development sees corporates shift to the dollar market… as others become less desperate. Not quite. We don’t buy into the argument that debt maturity extensions over the past few years have meant that corporates are no longer desperate for funding. There’s always need for more – to maintain defensive balance sheets, quell fears of rising costs and potentially hoard cheap funding for future M&A and/or investment. There are many other angles, but they have been trends rather than explaining why borrowers are out of the market right now. For instance, one of the big deals of the past few years as rates and underlying yields have declined has been to take the opportunity to extend maturities – cheaper debt for longer. Since 2011, index duration has shifted from under 4 to 5 years. In these more defensive climes, European investors are now looking for a more defensive play – hence a preference for shorter-dated debt which was in evidence with the recent BHP hybrid, with demand skewed towards the shorter-call tranche. This was not necessarily the case even as recently as in Q1 this year. Borrowers punch drunk on predominately longer funding might need to get used to the subtle shift in euro-denominated markets. Recently, a few household names have turned their attention to the dollar market and tapped longer-dated maturities there – EDF and Rolls-Royce being recent examples also able to get size done. All food for thought. That said, here’s hoping for a flurry of supply pre-ECB on Thursday to get the market in good shape into perhaps stronger words from the governing council on the potential for more QE.

Treading water as we closed out the week… We closed out flattish to very slightly better in credit. The iBoxx IG index was at B+160.4bp and just a basis point wider in the week, while the HY index was slightly better on the day at B+506bp and flat on the week. For the iTraxx indices, S24 Main was lower at 79.5bp and X-Over at 332bp (-7bp). It seems like we have found a level and need a catalyst to get us to move – in either direction. That could be headline risk around VW again, with reports of a potential class action investor lawsuit being considered; or, more likely, headlines around the current earnings season with some major corporates in the US out with reports. They include the likes of IBM, Caterpillar, Boeing and Microsoft. Chinese GDP is out overnight Sunday.

Wrong last week, but hopeful again for this week…We looked for the market to push on last week after some decent recovery the week before. We believe good levels of supply, which is taken down well, will help confidence. No supply into a mixed earnings season – like the week gone – might just see us trading in a narrow range but with a better bias. There doesn’t seem to be anything out there that will knock the socks off this market; it might just be a laborious grind for a while.

Have a good week.

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.