26th September 2016

Nothing’s gonna stop us now

MARKET CLOSE:
FTSE 100
6,909, -2
DAX
10,627, -47
S&P 500
2,165, +12
iTraxx Main
71bp, +1bp
iTraxx X-Over Index
325bp, -1bp
10 Yr Bund
-0.08%, +1.5bp
iBoxx Corp IG
B+123.8bp, -0.25bp 
iBoxx Corp HY Index
B+435bp, -3bp
10 Yr US T-Bond
1.62%, unchanged

Corporate bonds, where credit is due…

We’re into the final week of the third quarter of a remarkable year – for the corporate bond market. New corporate bond QE programmes from the ECB and the BoE have given an added boost to a market which we thought was going to perform well anyway. Still, as the long arm of the central bank manipulates this market – just as it has done with government bonds previously (and still is), performance is being assured.

The unwind is nowhere to being close and the US rate hike-induced wobble is locked away in the memory, at least until that 8 November FOMC meeting. So, as we close in on the end of the month, year to date returns for IG credit sit up at a perky 5.9% – and will only drop from here if the underlying (government bonds) starts to sell-off. Spreads will go tighter in credit, and we still look at an ambitious B+100bp as our year-end target (from B+124bp currently).

The HY market, in the doldrums in Q1, has fought back and returns are up at 6.8% year to date, and where somewhere of the order of 8% for the full-year isn’t impossible. Sterling corporate bond returns may have come off their QE-announcement highs (17.2%) to sit at 14.7% currently, but this market has still been the outstanding performer so far in 2016. Eurozone government bonds have returned 5.8%.

The S&P closed out on a high at the end of the week, so that ought to give us bit of a push at the open in today’s session. The DAX has 120 points or so to make up to get flat for the year (again, for only the second time) while the FTSE is just 50 points away (0.7%) from its 2016 high.

High yield primary in the ascendancy

Telecom Italia: €1bn issue

Telecom Italia: €1bn issue

It is not often that issuance in the HY market trounces that of supply from IG non-financial one. It did last week, as Telecom Italia’s €1bn issue and NH Hotels €285m offering on Friday took the weekly HY supply past €3bn versus just €2.5bn issued in the IG market. We’re also well over the €10bn mark for the month (around €12bn) and that’s not been the case (nor anywhere near it) since March last year. Admittedly, it was tense week just gone, but any anxiety has left the market now and we look for primary to pick up a head of steam through this last week of the month/quarter.

We also ended last week with another deal for the sterling market as FCA Capital lifted £400m in 5-year funding, while the BoE revealed some more structure and detail of its own corporate QE operation which begins this week.

The pipeline in IG non-financials is fairly rammed and we look for up to €10bn of issuance in the week. There’s little in the way to stop us, save for investors being focussed on their performance for the month-end/or quarter. That, though, ought not to stop them from taking on new deals when they emerge. Also,we will be casting an eye on the ECB’s weekly corporate bond drive-thru. It would seem that the ECB has been increasing its shopping load as evidenced by the increased average to €2.5bn of debt acquired in each week in the past fortnight. Today’s report from the central bank will make for an interesting read.

The net impact of this – when it finally dawns on investors, will be to have more and more involvement in primary. That means lower average allocations and the potential for ongoing disappointment with their fill (or lack of it). It also means that issues will come rich – or richer – as investors are sucked into a process which requires them to inflate orders (where they can) so that they might be looked on more favourably in the allocation process. Inflated orders make the deal look like a winner, so the pricing is squeezed some more. A vicious circle, indeed.  Thus the initial price guidance that banks come out with for new deals ought to be taken with a more than a pinch of salt where 15-20bp of a repricing tighter has become the norm.

Debate might inject some volatility

Trump: Next President?

Influential: US Presidential debate

The first Presidential wannabe debate kicks off this evening and might serve up a jittery session come tomorrow depending on how Trump fares. Other than that, there is little by way of data, while a whole host of Fed policymakers are due to speak although we think it is too soon after the last meeting and too long before the next one for their thoughts to make much difference to markets at this point.

Other than that, we’re back to “normal” in terms of government bonds with the Bund yielding -0.08% (10-year), the equivalent Gilt 0.72% and Spain at 0.96% – although Italy hasn’t managed to recover too much of its losses with the 10-year BTP at 1.26%.

All  of that has served to boost returns (as mentioned above) and will make monthly/quarterly/year to date performance look sharp once the week is out.

That’s it. Have a good week. 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.