31st March 2016

Phantom of the market

MARKET CLOSE:
FTSE 100
6,203, +92
DAX
10,047, +159
S&P 500
2,064, +9
iTraxx Main
72bp, -4bp
iTraxx X-Over Index
311bp, -11p
10 Yr Bund
0.15%, +2bp
iBoxx Corp IG
B+154bp, -1bp 
iBoxx Corp HY Index
B+542bp, unch
10 Yr US T-Bond
1.82%, +2bp

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What’s the level?…

Low yields, low rates, tightening spreads, zero coupon corporate bonds, ECB readying its guns, declining returns and worsening break-evens. You know what is happening, that it is coming and it is not particularly pleasant. The policy of dumbing it all down to zero leaves everyone in the same boat. A few extra basis points here or there will now make all the difference. We will be very happy with 2016’s performance but if the forecasts are true, it is going to be a mighty difficult 2017. Actually, it is likely going to be a tough second half of 2016 as the crunch tighter in corporate bond spreads and lower yields/coupons possibly plays out in the second quarter.

But what happens when it is all converges down to nothing, so to say? We take on additional risk, we desperately fund corporates with a “name your spread” begging bowl and hope that growth doesn’t return in any sustainable way, nor quickly. Funny that, and counterintuitive. Because it will blow the corporate bond market out of the water. Growth will be good for credit quality, ratings and investors assured in the knowledge they will get their money back – at maturity. Begging_BowlBut it would play havoc with the technical dynamic of the market and be a disaster for performance, for anyone looking to rotate out of credit into zooming stocks (or commodities etc) but also for the corporate bond market as a whole.

This scenario is unlikely, but one worth reminding ourselves of, because there are risks which are not necessarily associated with an economic doomsday event. That is, a material and sustainable pick-up in economic growth is not going to be the bond investors’ friend.

The walking dead. Rotate into what?

That question is much easier to answer at the end of the cycle, but now it is not so easy. Cash is still flowing into corporate bonds, and certainly from retail investors looking for a bit of income and protection of their capital. For institutional money, the process takes longer, but there is little by way of outflows from our asset class while the previous scramble to fund infrastructure projects and the like seems to have played out. There have been several false dawns regarding the end of the current cycle while even Yellen’s musings on Tuesday suggest the US is possibly failing to move on. The outlook isn’t great. M&A levels for the quarter are down, capex and investment levels are failing to pick-up, there’s little sign of returning inflation, consumption growth remains patchy, consumer and government debt levels are too high and structural reform is just a vague concept.

That’s been the story for eight years now and will be for a few more, as we’re all at the mercy of central bank profligacy. And we are witnessing the “next” impact of it right now as we head into quarter-end and that additional €20bn of bond buying by the ECB. No news yet on the corporate bond buying programme so the ECB will fill their boots in the meantime with “other stuff” – namely, more ABS, covered bonds and government bond paper – of which there is a shortage. The squeeze is on. It is no surprise that yields in the latter are crunching lower.

A weak eurozone consumer confidence print for March didn’t help – the lowest level since February last year, although Germany did manage to drag itself out of deflation, just. The 10-year Bund yield now resides at 0.15% – higher a touch germany-deflation-recoveryon the day as risk assets rallied, but will surely soon head into negative territory. The periphery outperformed with BTP yields for 10-year maturities now having just several basis points to drop before they see record lows (of 1.14%) again – currently at 1.21% (-2bp), while equivalent maturity Bonos (1.42%, -2bp) have a little more work to do in order to reach the same heights – or lows, rather.

Primary falls short, but a great month

With IG non-financials drawing a blank in yesterday’s session, we can safely assume that we will fall short now of the attempt on the record monthly issuance. Still, with €45bn printed, March will close out today as the second best month for issuance in the history of the corporate bond market in Europe. The absolute number is fantastic, but we haven’t had the plethora of borrowers that total suggests. ABInBev, BT, DT, Daimler and Pemex accounted for €28bn of it making the month strangely seem not so busy.danske-bank

There was much excitement around the ABInBev deal and it was cheap. For the other deals, notable was the DT intermediate maturity offering which eventually priced through the curve, according to our calculations. In the market today we saw only Danske Bank lifting €1bn in 5-year funding, and priced the deal 12bp inside the IPT on books close to €4bn. The total senior bank unsecured borrowing for the month now tops €22bn.

Closing out the quarter on the front foot

Stock markets took their cue from Yellen’s dovishness. Downside risks on growth and inflation mean an April interest rate hike in the US is unlikely, so stocks got a boost. The S&P rose to 2064 and is now further in the black year-to-date while the US dollar weakened and oil prices perked up a touch. Classic economics. In Europe, the DAX saw 10,000 for the first time since 13 January, but is still 6.5% down YTD at 10,047 (+149 in the session) while all bourses finished up on the day by between 1.3-1.7%. In corporate bonds, we closed pretty much unchanged. With little going on elsewhere, there was little going on in our market as we close out the month. We had a good session on the synthetic front with Main a whopping 4bp lower at 72bp and X-Over dropping to 311bp (-11bp).

Better stop here. 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.