6th July 2016

It’s not about (the) corporate bonds

MARKET CLOSE:
FTSE 100
6,545, +23
DAX
9,533, -176
S&P 500
2,088, -14
iTraxx Main
82bp, +2bp
iTraxx X-Over Index
355bp, +8bp
10 Yr Bund
-0.19%, -4bp
iBoxx Corp IG
B+149.25bp, +0.25bp 
iBoxx Corp HY Index
B+502bp, +8bp
10 Yr US T-Bond
1.37%, -8bp

It’s all about the Brexit (again)…

So here we go again. The BoE warned that post-Brexit machinations are already beginning to filter through into the wider economy. And it set off the predictable chain reaction. Lower government bond yields, stock market weakness except in the UK (lower rates to come), and sterling took a pounding while oil also dropped some. Great timing as far as the corporate bond market was concerned with the ECB keeping valuations underpinned though its own grab-fest, while the problems that come with this are for another time. So it appears that the market reaction post-Brexit has fast forwarded us to the kind of bond yield levels in government bonds we might have anticipated for 2017. That’s because without the political will to implement serious structural reforms, we don’t think there is any easy way out (or any way out) from the current malaise impacting the markets. Macro is still struggling despite some more upbeat data points of late and the central banks must be seeing this. Aside from the BoE’s potential easing, the ECB will feel compelled to act again while the Fed won’t be raising rates anytime soon (if at all in 2016).

So, the markets reacted. 10-year Gilt yields hit their all-time record lows of 0.77% (-6bp), while equivalent maturity Bund yields posted also fresh record lows of -0.19% (-4bp). US Treasury yields also printed record lows of 1.36% (10-year). WTI and Brent were off 5% to around $47 per barrel. Eurozone stock markets all fell initially by over 1% or more while the FTSE was alone holding in the black, propped up by the weakness in sterling (down to $1.30) and the prospect of imminent easing to come from the BoE.

total

Dual tranche offering: Total

The synthetic iTraxx indices widened as we would expect, given that they are credit market’s liquid risk proxies, and don’t have the technical support mechanism in place (like ECB buying) to be manipulated – as the cash corporate bond market clearly is. Cash held relatively firm because, after all, the ECB is lifting a stunning €450m of corporate bonds per session on average. However one looks at it (€2.25bn per week, €9bn per month, €108bn in year one), it is a stunning development.

The primary market saw a dual tranche offering from Total for a combined €2.75bn. Books were almost €8bn but, tellingly, skewed towards the longer-dated 12-year tranche. It’s where the juice is after all. Adding in yesterday’s €1.5bn from ASML we are up at a decent €4.25bn of issuance in the opening sessions of this month. If the volatility doesn’t get out of control as it did in periods during June, then we can expect a fairly hefty level of issuance over the next couple of pre-summer holiday weeks. €20bn is manageable while a little more would be welcomed by a market parched of issuance and competing for paper with the ECB. In financials, we had a lone euro deal in senior green bond format from Bank of China.

Drip, drip, drip of bad news continues

Italian financial risk was under specific pressure owing to the mounting problems at Monte dei Paschi with contagion risk on the sector taking in the CoCo bond market in particular. CoCo index yields overall have jumped and now are up at 7.95%, having given up almost 30bp in the session. We think that there might be a little bit more to go here, unfortunately – but the record 9.68% yield hopefully will not be seen again. We had Aviva suspending redemptions from its property fund (following on from Standard Life on Monday) and the fear is growing.

BoE Governor Mark Carney

Thinking positive: BoE Governor Mark Carney

What next? BoE governor Carney stepped-up and his press conference was one of assured calm and suggests that the BoE is ready and willing to nip any potential post-Brexit jitters engulfing the economy and causing a systemic problem. Gilt yields barely moved on the news (the 5-year Gilt auction got away easily) while the FTSE actually rose. Finally, the DAX and other European stocks were off by 1.5-2%, while news of a raid by authorities at German automakers’ premises in June on suspected steel collusion buying would not have helped sentiment (coming on the back of the emissions scandal).

In credit, there was only moderate weakness, with the Markit iBoxx cash IG corporate index left just a touch higher at B+149.25bp, but the rally in the underlying took the yield to 1.06% and now just 4bp from the record set in April 2015. And in high yield, there was only moderate weakness. The index was only 8bp higher at B+502bp suggesting little or no panic whatsoever in this market. Flows and volumes were their usual limited-self, but we dare say the ECB was lifting what it could through the electronic platforms.

The iTraxx indices closed with the cost of protection rising, but in very measured fashion. Main was up at 82bp and X-Over at 355bp, just 2bp and 8bp respectively versus the closes of the previous session.

That’s it. Back in the morning.

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.