3rd November 2016

Oh Donnie boy

FTSE 100
6,845, -72
10,371, -155
S&P 500
2,098, -14
iTraxx Main
75.5bp, +1bp
iTraxx X-Over Index
339bp, +4bp
10 Yr Bund
0.13%, -5bp
iBoxx Corp IG
B+124.3bp, +1.5bp 
iBoxx Corp HY Index
B+419.6bp, +8bp
10 Yr US T-Bond
1.80%, -3bp

The Donald stirs the cockles…


Making waves again: You-know-who

Anyone know why government bond prices rose, yields fell.. hard in yesterday’s session? After all, Eurozone manufacturing growth accelerated to a three year high in October while German unemployment continued to fall – and to a new record low of 6%. Gilt yields plummeted, even after Moody’s warned of a ratings downgrade should the UK get a bad Brexit deal.

With such glowing economics in the Eurozone and rating warnings for the UK, yields should be going up, not down according to simple economic theory.

Where was the market conviction that the good times are back, that we have passed the inflexion point of uncertainty, the Fed will raise rates in December and tapering from the ECB is on its way? And then we got it – Donald Trump! It seems like we are playing out to every headline. Or every opinion poll that emerges from the US.

Someone forgot to tell to tell corporate bond market participants that trouble was on the horizon, or we just ignored as a slew of borrowers flexed their muscles to get some funding in ahead of the Fed, and amid a rush for safe haven assets. Corporate bonds have fitted the “safe haven” tag since the crisis began and so we had ought not have been surprised that primary markets continued to pump out deals – blissfully unaware of the potential impending volatility. It could be a rocky close for 2016, but if it is, it will boost this year’s fixed income performance (Trump wins, Treasuries rally, government bonds in Europe rally, credit rallies, equities sell-off – and we ignore the potential rate rise in December, it of comes at all).

Deals, deals, deals

Abertis weighed in with a €500m Primary deal, one of several.

Abertis weighed in with a €500m deal, one of several on Wednesday

Primary saw a bit of a flurry in the IG non-financial sector with Abertis (€500m), Fonterra Co-op (€350m), Dover Corp (€600m), G4S (€500m) and Statoil (dual tranche €1.2bn) taking down over €3bn between them, in what was a good day’s work.

We think a €20bn+ month is very likely but the supply will likely emerge in fits and starts due to the sheer number of hurdles we face this month (non-farms, FOMC, earnings, US election and Thanksgiving to name but a few).

The pipeline continues to build and several high yield deals are in the offing for this week. The high yield prints ought to come as long as no major negative drop besets the equity markets in particular, while rate markets should not have a material impact – sentiment apart – for risk assets. Betting/gambling group Ladbrokes added to the sterling high yield total with a £300m deal.

Winners and losers

The fixed income markets were the session’s winners as those yields fell quite precipitously. The 10-year Bund yield was down at 0.13% (-5bp and after having seen 0.20% intraday on Monday), while the equivalent Gilt yield fell by a massive11bp (to 1.17%). Italian and Spanish government bond yields followed suit, lower by 9bp in those 10-year maturities at 1.66% and 1.20%, respectively. We can’t help thinking that the levels will be temporary and ratchet higher again if Trump fails to win the US presidency.

As for equities, last week, the DAX had managed to haul itself into the black YTD for only the second time this year, but it is now some 360-points away from achieving that feat again. German equities have had a tough few sessions. The weakness in equities was seen in all equity markets, where indices in Europe were lower again, by up to 1.5%. Oil prices also declined, but for different reasons. The lack of an agreement is weighing on traders and when we see the kind of jitters around equities from US politics and the like, then it is small wonder it feeds through into sentiment around oil. It didn’t help that US crude inventories rose last week. Brent per barrel was down almost 2% and trading off a €46-handle while WTI was trading at under $46 per barrel.

And then there was secondary credit

Secondary spreads were under a little pressure, spreads on a cash index basis (Markit iBoxx) some 1.5bp higher in IG. High yield also saw some weakness and it was more material as spreads on the index moved 8bp wider to B+420bp and back to mid October levels. These last two sessions are the first two of weakness in credit spreads in a month. The weakness followed through in sterling corporate credit, completing the triumvirate but just 1.5bp wider for the sterling Markit iBoxx index. The iTraxx indices closed higher, with Main at 75.5 and X-Over at 339bp.

And the Fed didn’t move after all. 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.