17th March 2016

Other beers refresh the parts

MARKET CLOSE:
FTSE 100
6,175, +36
DAX
9,983, +50
S&P 500
2,027, +-11
iTraxx Main
77bp, +1bp
iTraxx X-Over Index
327bp, +1bp
10 Yr Bund
0.31%, -1bp
iBoxx Corp IG
B+155.2bp, +1.5bp 
iBoxx Corp HY Index
B+541.5bp, +7bp
10 Yr US T-Bond
1.91%, -6bp

Don’t be impatient, Rome wasn’t built in a day… Less than a week later, the euphoria that greeted the ECB’s additional easing measures has gone. It’s almost as if we have had a risk rally cliff event, stopped dead in its tracks. Don’t worry, we believe it is a healthy sign that markets prone to exaggeration – up or down – are now acting out in a measured way. Admittedly, a few concerns are lurking. For example, 6 weeks ago Deutsche Bank was on the ropes while on Monday it took €1.5bn in 3-year funding. Is Deutsche Bank – or the banking sector, for that matter – fixed, or are we merely correcting past ills with sticking plaster? And then we had Transurban Queensland pull a deal in a completely unexpected move into a so-called bullish market. Oil was on its knees a month or so ago too, but we’ve seen some good price recovery and now wonder whether the $40 per barrel level is sustainable. For corporate bond markets, the trend will be for spreads to continue to move tighter as the market becomes more and more technical, while stock markets (and commodities, oil in particular), will play out to the prevailing headlines. We might need a renewed push for the corporate bond market to tighten more aggressively after the huge spread recovery witnessed since last Thursday, and that will possibly not emerge until details of the corporate bond buying programme are announced. It could be a “long wait” well into the second-quarter before that happens, but few will bet against the market exhibiting much or even any weakness ahead of it. Risk positions will remain intact. Reducing anything now will only store up disappointment later because the need/scramble to get risk on board (mainly through primary) isn’t going to leave us. Secondary market liquidity will not be your friend, and being underinvested will be painful.

Just two corporate borrowers, but boy, oh boy!… Incredibly, we saw just two issuers from the corporate sector – but close on €15bn of issuance. ABInBev busted all records with a multi-tranche €13.25bn effort on demand exceeding €30bn – the largest offering in a single take in the history of the corporate bond market in Europe. Draghi’s action last week might have had something to do with it, but before we get carried away and assign all the credit to the ECB’s work, the debt-raising was needed to fund the group’s $100bn+ SAB Miller acquisition. The ECB’s announcement was super timely because it assured demand for this deal while the pricing would otherwise have much higher. That’s because investors are in “grabfest mode” and looking for guaranteed performance (it is never guaranteed). ABInBev’s treasury desk will be rubbing its hands with glee at its fortune. Mind, so will the banks with the fees the deal brings. It was a barren period in January and February on the issuance and fees front, but March has turned out to be the pot of gold at the end of the rainbow. The other deal worth a mention was the €1bn T2 raising by Commerzbank, the second such deal of the week. For non-financials, that’s €21bn of issuance this week alone already, €32bn for March so far and around €71bn YTD (all Dealogic data). That’s fantastic, but we are still well down on the record quarter of Q1 2009, when €120bn was issued! This is the tenth best month for issuance in history – and we still have a week and a half of business to go. The best month in European corporate bond market history for non-financial corporate bond supply was January 2009, when €49bn was printed, and the current run rate suggests we could beat it (see chart).

10th heaviest month for issuance in history – so far

FOMC good for risk assets… We put down the markets more apprehensive performance in the session down to nerves ahead of the FOMC communique. In the end, the Fed left it all unchanged and recognised/flagged global risks impacting their rate decision – with just two hike likely in 2016. Before it, in equities, the DAX and FTSE managed gains of +0.5% while most other bourses were flat to a small negative. US stocks received a limited boost on the Fed decision. Oil prices were much higher with Brent up 4% and at just over $40 per barrel again. Government bonds did little, with yields just edging down in Europe by a basis point or so, although the US 10-year yield fell 6bp t0 1.91% after the FOMC newsflow. In credit, we edged wider with low beta sectors holding much better than the higher beta CoCo and corporate hybrid areas. The Markit iBoxx IG corporate bond index was up at B+155.2bp (+1.5bp), and back to being wider YTD – just. The heavy supply in the last couple of session seems to be have had an impact on secondary valuations.

It’s all good, have a good session.

Suki, Alan and Caroline

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.