19th April 2016

Oil, Oil, Toil and Trouble

MARKET CLOSE:
FTSE 100
6,354, +10
DAX
10,120, +69
S&P 500
2,094, +13
iTraxx Main
71bp, -2bp
iTraxx X-Over Index
308bp, -9bp
10 Yr Bund
0.16%, +3bp
iBoxx Corp IG
B+148bp, -0.5bp 
iBoxx Corp HY Index
B+506bp, -2bp
10 Yr US T-Bond
1.77%, +2bp

Sneaking in through the back door…

Oil took the headlines, but a potentially interesting development could be occurring in the corporate bond market. We had a couple of “sub-benchmark” transactions on the screens again, following on from the two of last week. Alliander and DIA each sold €300m-sized deals – which are €200m short of what is needed to make most indices (the benchmark size) and therefore to reach the broadest range of investors. Sub-benchmark side issues are normally more difficult to get away for this reason. However, the books on the deals were over 5-8x subscribed, suggesting an easier sell than might have otherwise been the case.

The question is, has the “Draghi effect” changed the nature of the game here too? That is, such is the need to get paper on board – and it will only intensify once the ECB actually starts to add benchmark risk – that investors are finding themselves holding fewer and fewer of the cards. We’re getting to the stage where the borrower can pick his size, maturity and (almost) his price. Investor risk positioning is intensifying, and this could be another negative for the market. Should we get the (inevitable?) unwind, there will be little or no room for bonds from these smaller deals – as off-index positions – and hence they will elicit the poorest of bids, whatever the quality of the bond.

Oil

Oil prices: A turbulent day

As for that opening heavy drop in oil prices, the only ones licking their lips would have been consumers. Oil initially had a shocker as the Doha shindig failed to elicit agreement on a production freeze. Distrust, suspicion, regional conflict and greed made for an unholy concoction of ingredients which assured us that the outcome would be failure. Why were we even surprised? Oil prices reacted accordingly and the inevitable follow-through into other risk assets ensued. Still, after the initial selloff the broad reaction was actually quite muted and the fallout contained, before we rallied hard into the close. So we had the expected knee-jerk reaction, but the whole issue seemed to have turned out to be a storm in a teacup. Oil prices per barrel whipsawed throughout the session, and having fallen 7% initially managed to stage a great comeback as the day progressed, to close less than 1% lower (Brent) and still trading on a comfortable $40+ handle.

Losses reversed as markets “move on”

Yeah, yeah. That seemed to be the attitude of the markets in the session. There is just no stopping equities. Oil’s massive recovery aided sentiment and while the price per barrel remained choppy, equities didn’t follow suit. An amazing late surge in stocks saw the DAX up 0.7% at 10,129, having been in the red for much of the day. Other bourses fared less well, but all ended in the black. That wasn’t what we might have anticipated, while safe-haven risk assets gave a little back too.

Bund yields edged up – the 10-year at 0.15%(+2bp), for example – while most other government bond prices moved very slightly up or down. What to make of it all? That the current newsflow around oil is no longer dictating pricing elsewhere and we need something fresh – within the oil market or not – for that to happen.

Primary splutters, credit valuations intact

Primary issuance saw Alliander with the ninth green bond in 10-year funding, while DIA printed a 5-year deal. Both were priced 15-20bp inside initial price talk, as per prescription. German publishing group Bertelsmann’s 10-year issue was a less aggressive 13bp inside IPT for €500m when it was finally priced. The €1.1bn of IG non-financial corporate issuance on Monday takes the monthly run rate to €22.1bn and is now less than €5bn off the record for any April in history. We should make it before the week is out.

wells-fargo

Two tranches for Wells Fargo

Wells Fargo issued a couple of senior tranches to keep senior bank issuance, low of late, ticking over, although they collected a hefty €3.5bn. Argentina – just emerging from default – gets a mention as it was in the market for an eventual $15bn of funding across several tranches, eliciting $50bn of interest (as at the time of writing). Juicy coupons and/or a punt? Either way, the single-B rated sovereign is just emerging from a messy, sometimes very political default and we can only say “be warned” – history is certain to repeat itself!

In the secondary market, a rather uneventful session still saw the market better bid. Nothing major but credit remains in good shape. Whatever was going on with oil price volatility and so forth, there was no contagion into credit. We closed better in cash in a rather uneventful session, but we visited the lowest levels of 2016 in both IG and HY, on an index basis. better equities boosted the synthetic indices with Main at 71bp and X-Over at 308bp.

That’s it. Have a good day, 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.