21st April 2016

Momentum

MARKET CLOSE:
FTSE 100
6,410, +5
DAX
10,421, +72
S&P 500
2,102, +2
iTraxx Main
70bp, unch
iTraxx X-Over Index
299bp, -3bp
10 Yr Bund
0.15%, -2bp
iBoxx Corp IG
B+146bp, -0.5bp 
iBoxx Corp HY Index
B+497bp, -2bp
10 Yr US T-Bond
1.83%, +5bp

And now the unstoppable juggernaut…

As bad as the markets were in January and early February, the opposite is now true. Even in yesterday’s session, the markets in Europe maintained an upbeat tone despite being greeted by weakness in Asia overnight. The omens appear to be good and we certainly look to a decent week or so before we close out April. Equities higher, credit spreads tighter, oil prices up and even government bonds slightly better bid, for choice. The nerves though will be jangling a little as we go through May and get closer to the ECB announcing the details of their intentions for corporate bond purchases. We don’t think that happens today and the market hadn’t ought to be disappointed if that turns out to be the case. As a reminder, we think they will struggle to lift much more than €2bn a month.

In the meantime, we noticed in Wednesday’s session that Unibail-Rodamco were initially out with dual tranche €500m/10-year and €300m/20-year issues – but later increased to €500m for each.

Unibail Radomco

Unibail Radamco: Active Wednesday

As well as being surprised by the demand for the longer issue, the group actually increased it to €500m – and achieved “benchmark status”. We dare say they could have got the €300m done easily (good demand saw them increase it) but make the point that size is no longer a handicap in getting enough investor interest in a bond issue. We fleshed out this point in an earlier comment this week and we think that there is a high likelihood that more borrowers will look to getting smaller deals away, rather than be coerced by bankers into doing bigger deals to access the widest audiences – as well as to improve the issues liquidity. Size doesn’t necessarily lead to better liquidity – that’s for another comment.

Anyway, only time will tell whether we get any new “benchmark” less than the current one of €500m needed for inclusion in most IG indices. The ECB’s impending involvement has changed the nature of this game. In the HY market, the hurdle for gaining “benchmark” status is lower, typically €150-250m, and these are the sorts of deal sizes/borrowers/ratings we need to get used to as being the norm for the funding transmission mechanism Draghi et al talk so much about to get working. SMEs will not be able to raise, nor need, much more than this. Unfortunately, this is not going to happen as a pure capital markets play – it will take too long, and the market isn’t ready for lots of smaller sized deals of this nature. The banks are going to have to step-up to the plate. We think even that is unlikely unless – or until – we get some clear visibility in the economic outlook and/or, more to the point, the politicians and regulators ease the capital restrictions strangling that particular bank lending dynamic.

Primary busy, but just one non-financial in IG

Heineken refreshed with a 10-year, while the HY market saw an increased €500m issue from Buzzi Unicem. The HY market has really disappointed this year and while January and February were big risk-off months, we have failed to get much traction since then. The HY market investor base (and IG players for that matter) has been receptive to bigger groups, national champion-like fallen angles, but for the rest, it has been a tough ask to get a deal away. The Buzzi deal was well-received and they managed to price 25bp inside the initial guidance. Unibail did the same on books 5-6x oversubscribed while Heineken only managed to squeeze final pricing around 15bp better than IPT. With Heineken being the sole IG non-financial on the screens, the total for the month just tops €23bn. The rest saw a senior HoldCo issue from KBC (€750m, -23bp inside IPT) and then the usual smattering of covered bond and SSA transactions.

All good, get involved

Corporate hybrids are still in vogue/demand. The yield on the non-financial corporate hybrid index, for example, has dropped to 3.94% (-10bp in the session) and back to levels last seen in September last year. We ought to expect that as yields drop further – which they will – that more issuance will come. Cheap equity. The tightening in the session was broad based and the Markit iBoxx IG corporate bond index set another 2016 low of B+146bp as secondary continued to squeeze.

It feels good, if not  little frustrating because offered side liquidity is worsening. IG index total returns are up at 2.75% YTD and that is excellent. High yield spreads were tighter/prices higher, and the index managed to edge just little lower while index total returns are now up at 3%! Surprisingly, the synthetic indices underperformed again and edged only a little lower, with the Main iTraxx index at 70bp (unch) an X-Over at 299bp (-3bp).

dax

Up: Deutscher Aktienindex

And finally, the DAX closed up 0.7% at 10,412 and is now just 300 points off being flat for the year (single digit percentage points). Oil prices perked up after US inventories for the week came in lower than expected. Brent was up at $45.5 (+3.5%) and we haven’t seen a level that high for Brent this side of 2016 (since November last year actually). Bund yields ended a little lower, the 10-year at 0.15% while peripheral risk was also slightly better bid. The S&P closed higher and could help markets in today’s session.

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.