22nd September 2016

Next time, perhaps

MARKET CLOSE:
FTSE 100
6,835, +4
DAX
10,436, +43
S&P 500
2,163, +23
iTraxx Main
73bp, -1bp
iTraxx X-Over Index
341.5bp, -3bp
10 Yr Bund
0%, +2bp
iBoxx Corp IG
B+124bp, unchanged 
iBoxx Corp HY Index
B+441bp, -2bp
10 Yr US T-Bond
1.65%, -3.5bp

Fed holds steady, reason to rally…

The markets decided from the start that the Fed was going to hold-off from raising policy rates, and we saw a good rally in equities on the back of it. However, for once, the rising tide didn’t lift all boats and rising equities actually saw a small decline in government bond prices (higher yields) as that classic relationship re-established itself. The BoJ’s overnight shift to yield curve management versus targeting the monetary base had an impact on the moves too. Otherwise, there was little to get too excited about anywhere, with just a couple of FIG deals in primary – although we did have several much welcomed HY deals (€1.15bn) in credit amid a small tightening bias generally in corporate spreads. Given that issuance was light in Tuesday’s session, it shouldn’t have come as a surprise to anyone that we had more of the same yesterday. Secondary activity levels were also low as investors waited.

So, the Fed decided not to move. The speculation as to when they might eventually do so will grip a few, but it’s actually becoming quite tedious pondering a rate move into each meeting. The rate tightening cycle was, after all, supposed to have begun several years ago. There’s little more to add here, except that risk assets should be better bid for a while now.

High yield still a traditional investors’ market

A trio of deals in HY today makes this month easily the best of the year so far (actually in over a year) – almost €10bn printed in this market. We’re on course to double the previous best month (May, almost €7bn issued, all Dealogic data). Finally, something has woken the beast because we would have thought that the lowering of corporate bond yields would have prompted corporate treasurers to have chanced their arm earlier (the demand we feel was always there). Admittedly, HY spreads have been stubbornly high, and we would think that some of the weakness in spreads currently has come about because of the heavier issuance. We conclude that some investors have been selling in order to make room for newer deals, and as yet the crowding-out of investors from IG (because of the ECB) has failed to elicit much interest from them in this market.

That interest will come. The ECB is upping its game and seemingly making a real go of it as is hammers home its intentions. They want – and need – the knock-on effect from their heavy handedness to crush IG yields/spreads and leave the markets to finance more the higher yielding arena. The ECB’s average weekly lift of IG corporate bonds has gone up to over €1.8bn. The last week saw the central bank hoover up €2.6bn of IG debt – their highest level in the 14-weeks of activities far. Over €25bn of corporate bonds have found their way to the ECB’s coffers – and this debt will never find its way back into the market.

Different day might bring riches

The 10-year Bund yield closed at 0.00% (+2bp), the equivalent Gilt was unchanged at 0.80% while most other markets saw yields edge up. The 10-year US Treasury yield was 3.5bp lower at 1.65%. Equities had a better session of it (as suggested above) with indices up to 0.5% higher in Europe while the S&P was playing out in the black into the Fed rate call, recording a small increase – only to rally harder after, up over 1% (+23 points).

In credit, we closed completely unchanged. There was little going on in IG – primary or secondary! In HY, the better equity backdrop and general risk-on tone there helped solicit a better bid and we closed a touch better. The Markit iBoxx index closed at B+441bp (-2bp).

Today’s session ought to see a pick-up in primary now that any nerves ought to have been dispelled, and we would think it is generally risk-on until the next data point.

Have a good day. 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.