7th March 2016

What you talking ’bout Willis?

MARKET CLOSE:
FTSE 100
6,199, +69
DAX
9,824, +72
S&P 500
2,000, +7
iTraxx Main
92.5bp, -3.5bp
iTraxx X-Over Index
374bp, -15bp
10 Yr Bund
0.24%, +7bp
iBoxx Corp IG
B+174.8bp, -1.5bp 
iBoxx Corp HY Index
B+598bp, -11bp
10 Yr US T-Bond
1.87%, +4bp

Markets look on the bright side… There is every reason for corporate bond market cash spreads to continue to tighten from here and through March. We clawed back 11bp last week in the IG index, and the improved sentiment on the back of the US jobs data ought to help maintain a better bid for risk assets generally. Sifting through the chaff, the headline jobs figure was very uplifting and the unemployment rate stable but, with wage growth slipping in the month, we think that the Fed can and should wait. The US economy has faced some headwinds of late and the economic data hasn’t been particularly cheery. Playing it safe rather than risking being sorry appears to be the prudent course of action to take at the next meeting in two weeks’ time. For now though, all eyes turn to the ECB. They will no doubt take some action because the economic trajectory and dynamic in the eurozone are quite different to those in the US. The policy paths will diverge and should give a further boost – if only a short-term one – to risk assets. It’s a win-win, but for all the wrong reasons. That doesn’t matter for the moment. We can understand that the corporate market is having a torrid time this year (wider spreads, essentially), but it has fared relatively well in terms of volatility and specific event risk when set against its more ‘illustrious’ cousins: equities and commodities have been the place not to be. The iTraxx indices will play to the tune of macro, volatility in equities and other event risk. Corporate bond markets will and ought to continue to look on from the sidelines, quietly absorbing new deals – should we get borrowers willing to print them – while secondary will be directional, with little of the exaggerated moves seen in equities and oil as and when the newsflow has dictated.

Stranger things have happened… At 9,824, the DAX is “just” 919 points away from being flat for the year to date (-8.5%), having managed to claw back a deficit that was once 18.5% (or -2044 points). The FTSE is only 43 points off being flat, needing to rise by a mere 0.7% to get there. And the S&P 500 needs to climb by just 2% to achieve the same feat. For the latter two, we could be there before this week is out, while for the DAX, that could well happen some time into the week after, depending on what emerges from the ECB come Thursday. By the way, oil, as measured by Brent, is a dollar higher per barrel YTD ($38.7). It was only several weeks ago that it was more than 35% or $12 per barrel lower. That level of volatility is impossible to trade. The recovery, though, has been motivated by the fact the ECB is likely to provide more stimulus, although we would think the market is choosing to believe that the US, despite some very mixed data prints, is steering a course to economic safety (some kind of sustainable growth, albeit at a lower rate). The equities story has been all the more remarkable because they have been so resilient for several years in the face of a tidal wave of poor post-crisis economic newsflow. Central bank stimulus has done its job.

Has the fightback started?

HY Chart 07Mar16

Risk assets fight back… Government bonds gave some performance back in the week, with 10-year Bund yields rising to 0.24% having seen a 0.10% intra-day low earlier in the week. The big backup in the 10-year on Friday (+7bp) saw to it that they underperformed versus the periphery, with BTPs and Bonos 2-4bp higher at 1.46% and 1.55% respectively. That was probably suggestive of some profit-taking. The 10-year Treasury backed up 17bp in yield to 1.87%. In credit, low beta IG outperformed (B+175bp, now +21bp YTD), while we saw little or no real move in CoCos or corporate hybrid sectors into last week’s close. The Markit iBoxx high yield index was back through B+600bp and 40bp lower in the week to B+598bp. The index yield was down at 5.70%. The high spread for 2016 was B+668bp just three weeks ago, and the high on the index yield 6.43%. Feeding into the better tone, the iTraxx indices saw Main down at 92.5bp and X-Over better offered at 374bp, some 10bp and 47bp lower respectively. Not quite up by the stairs, but certainly down by the elevator. Primary markets also had a good week, although the €11.5bn in IG came mostly from four borrowers lifting multi-tranche funding (BP, Daimler, IBM and BT). It is difficult to ascertain how this week might pan out, but let’s hope a few look to get something done ahead of the ECB, although it doesn’t take much to work out that there will be plenty of opportunity post-ECB, likely on better all-in terms. Chinese export/import and inflation data could set the tone as we kick off proceedings this week.

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.