13th December 2016

Nowt about

FTSE 100
6,890, -64
11,190, -13
S&P 500
2,257, -2
iTraxx Main
72bp, -1bp
iTraxx X-Over Index
302bp, -6bp
10 Yr Bund
0.40%, +4bp
iBoxx Corp IG
B+135bp, -1bp 
iBoxx Corp HY Index
B+422bp, -9bp
10 Yr US T-Bond
2.47%, unchanged

Winding down…

5th in 5 years: New Italian PM Paolo Gentiloni

It might be “FOMC week”, but it does look like we have shut up shop for the year. That was a ‘nothing’ session in trading volume terms. The news flow was around a non-OPEC producers agreement to cut oil production which saw Brent up at $55.6 per barrel (+2.5%) – and double the level it traded back in January. There is an option-like move if ever there was one.

The Italians installed a new Prime Minister after Renzi’s dramatic resignation following that referendum loss, allowing the country’s banking sector some stock market support as the political event-risk was seen to wane. Unfortunately for all fixed income investors, bond markets continued to sell-off, which saw the German 10-year yield top 0.40% intra-day at one stage, French yields were north of 0.90% (and the day’s worst performer) while the 10-year Gilt was siding up to 1.50%.

Primary activity in the session, for euro-denominated corporate debt markets delivered a zero. However, the sterling sector saw Daimler (£250m) and Thames Water (£400m) and we think that these two borrowers will likely see off the year for this particular market.

For sure, we can safely say that the BoE’s QE programme did stir the primary sterling market into life with a preponderance of issuance since that QE announcement back in the late summer. We don’t think Draghi ought to assume the same for the euro-denominated primary corporate bond market. Issuance hasn’t particularly risen as a direct response to the ECB’s QE effort – even though it has been a fantastic amount of bonds that the European central bank has accumulated.

ECB pretty much at €50bn

The ECB reported that it held €49,906m of IG non-financial corporate debt. Just €94m short of that headline €50bn, but we dare think that they will have reached it during yesterday’s session.

Last week’s grab took in a lower €1,663m versus the near €1.9bn average of the previous several weeks – and it was the lowest weekly amount that the ECB has taken for 14 weeks (early September, see chart). Perhaps the ECB is also winding down for Christmas.

Recent ECB weekly corporate bond haul

With market participants heading into holiday mode, the reduced level of secondary market activity from now until the new year will probably see the ECB’s weekly haul fall markedly. Still, if the markets retain a risk-on like tone, and government bonds don’t sell-off with any gusto, then there is a good chance that spreads could actually tighten a little more disproportionately. After all, if they can manage to take €1bn+ of liquidity out of the market per week, it can only support spreads.

Government bond markets still running scared

With little else going on, the market focussed on the FOMC saw to it that government bond markets sold off. 10-year US Treasury yields rose to reach 2.50% (fell back to 2.47%, unchanged) while in the Eurozone the markets recovered a little to close off their session wides. Trump’s election victory really has been a poke in the eye for fixed income investors. Gilt yields rose but managed to close below 1.50% (10-year) at 1.46% (+1.5bp) with similar moves in the Bund as the 10-year closed at 0.39% (+3bp), having seen 0.42% earlier in the day. The 2s/10s Bund curve steepened to 63bp. French paper took a leg lower (in price) as the markets decided to use the May elections as a reason to sell, with 10-year OATs yielding 0.87% (+7bp).

It seems like yields in the Eurozone are being dragged higher by rising Treasury yields, because the recent albeit upbeat data doesn’t justify rising yields. ECB policy will remain accommodative through 2017 however one reads the last central bank minutes/press conference. We would be surprised if the 10-year benchmark Bund yield sees a 7-handle (0.7% or more) yield next year, but if we do it will be because we’re up at 3% in 10-year US Treasury yields and materially higher US growth looks as if it will benefit everyone.

As for secondary credit, for choice, we edged a little better. The Markit IG iBoxx corporate bond index at B+135bp (-1bp) although index yields rose as the underlying was weaker. So close to those year-end marks, investors will be hoping there isn’t much more weakness in government bonds. The IG sterling market was unchanged, focused no doubt on the supply as mentioned above, but the weakness in Gilts saw to it that the index yield rose 4bp to 3.21%. The HY market was the big outperformed and this was reflected in the index level at the close, left at B+422bp (-9bp). iTraxx Main closed at 72bp (-1bp) and X-Over at 302bp (-6bp) probably on easing concerns around the Italian banking sector.

On a housekeeping note,  with market activity winding down, we are going to as well. We will be back with a final 2016 comment on Friday – unless any news or market activity which may warrant further notes occurs in between, or indeed between Christmas and New Year.

Have a good day.

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.