12th April 2016

Off to the races

MARKET CLOSE:
FTSE 100
6,200, -4
DAX
9,683, +61
S&P 500
2,042, -5
iTraxx Main
78bp, unch
iTraxx X-Over Index
332bp, +9bp
10 Yr Bund
0.11%, +2bp
iBoxx Corp IG
B+150bp, +0.5bp 
iBoxx Corp HY Index
B+530bp, unch
10 Yr US T-Bond
1.72%, unch

The sun always shines…

The week has got off to a bright if rather unexciting start. Stocks generally up, oil in a narrow range and corporate bond spreads unchanged. What’s not to like? There was some corporate bond supply and the run rate seems to point to a record April and one of the heaviest months ever for non-financial IG issuance. The World Bank might be downgrading global economic growth forecasts (to 2.5% from 2.9%) and the Japanese economy is (again/still) stuck in a rut, but the show goes on.

Strong full-year results anticipated from Tesco tomorrow

Tesco: Stronger full-year results anticipated tomorrow

The market liked the new-look Tesco (results Wednesday) as well as greeting with much relief the potential for a bank bailout plan in Italy designed to reduce pressure on non-performing loans and address issues around distressed lenders. There was also a sense of inevitability and reality in the investment process as Austria took the decision to bail in senior creditors as it wound up Heta Asset Resolution AG. They’ve set a precedent, but for the markets to be overtly worried we would need another deep financial crisis, bringing many other institutions into the immediacy of bailout territory. The odd wind-up/bail-in here or there isn’t going to have a material impact on the market.

Overall, higher beta risk had outperformed and for much of the session we had peripheral government bonds gaining at the expense of safe assets like bunds which – after a solid open that saw the 10-year yield briefly fell below 0.08%, prices came off a little into the long-dated French OAT auction.

Primary continues to deliver

bmw-factory

Dual tranche: BMW boosted the supply

Air Liquide, Eurogrid and a dual tranche from BMW combined to add €2.55bn to the supply total, taking it to €16bn in just 7 trading sessions. Remember, the highest level of issuance for any April is €26bn, while €48.4bn is the monthly record.

What’s more – and this comes as no surprise – the deals were priced 12-20bp inside the initial price talk. That’s a trend that isn’t going to falter any time soon. It makes too many vested interests too controlling and too happy (issuers and syndicates versus investors).

The yield on the €750m, 4-year, single-A rated BMW tranche equated to around an eye-wateringly low 0.20% on a 12.5bp coupon. We suppose that the deal is a better than 4-year Bunds – and BMW is a blue-chip national champion after all, if not quite an arm of the government! The point is that corporate bond yields and spreads are continuing to decline, and they will go much lower once we have some colour and visibility on the ECB’s corporate bond purchases. The rest of the new supply was largely confined to covered bonds.

The earnings season might inject some volatility into the market which we believe will mostly be confined to equities, so corporate bonds ought to stay better bid and interest in them sustained through a buoyant primary sector.

Earnings awaited, if only for an excuse to give some direction

A decent close in Asia overnight pointed us towards a good start in Europe, and the US played out the same way. Better stocks firm sentiment and we managed to see out the session on the front foot, albeit with a little apprehension in some quarters ahead of the Alcoa release, with several other bellwether blue chips to follow this week.

European equities finally finished off the session highs, government bonds were slightly choppy – playing out in a tight range and eventually weaker – with yields a touch higher after that more promising open. 10-year Bund yields closed at 11bp (+2bp) while earlier gainers like BTPs (1.34%, +3bp) and Bonos (1.51%, -1bp) also saw performance mixed into close. Oil prices also gained by up to 2% with Brent closing in on a $43 per barrel handle. Nothing to worry about in any of that.

Cash credit held firm throughout and the new supply, as already mentioned, was taken down well. It seemed that the synthetic indices were not playing ball though and just edged wider in a lacklustre session. Anyway, the Markit iBoxx IG cash corporate bond index was half-a-basis point higher at B+150bp which translates into being noise in the big picture. The only obvious weakness was in the CoCo market, but an up day in stocks would soon correct that. The high yield market closed unchanged.

There was a late slide in US stocks into the close as earnings related nerves took hold. And probably that slide was justified as Alcoa missed on revenues although it beat – quelle surprise – on lowered earnings forecasts.

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.