2nd November 2015

Please sir, I want some more

MARKET CLOSE:
FTSE 100
6,361, -35
DAX
10,850, +49
S&P 500
2,079, -10
iTraxx Main
71bp
iTraxx X-Over Index
298bp
10 Yr Bund
0.52%
iBoxx Corp IG
B+152.9bp, -0.5bp 
iBoxx Corp HY Index
B+483bp, -1.5bp
10 Yr US T-Bond
2.14%

That’s more like it… We closed out an eventful week/month firmly on the front foot, with risk assets showing some very good price recovery. A drab start soon faded and we saw primary pick-up with a few cheap deals to start us off, eliciting good demand/books and rallying hard on the break. That’s how it nearly always happens after a barren spell resulting from macro volatility. The dynamic was a perfect confidence booster and set the tone post-Fed. Along came more deals, good performance, limited Street inventory, any firm offer lifted and spreads going tighter almost everywhere. S&P’s hybrid bond methodology change was forgotten in double-quick time (some good recovery in bonds, which saw prices fall hard), while the possible regulatory risk around low/high triggers in the CoCo market only managed to halt any upside in that sector. We’re into chapter 11 of 12, but that will not halt the positive momentum built during the past few sessions. IG spreads have recovered over 50% of their September losses in October. HY spreads are close on 70bp tighter in the month (with iBoxx HY index total returns up a whopping 3.1%). Granted, equities may have done better (most indices up over 8% and the best month in several years) – but they did a lot worse than credit in September. We can expect more issuance than before through November, with a significant backlog of deals needing to be printed.

Something for everybody… In the end, the month has turned out to be a good one, with IG iBoxx corporate index spreads 18bp tighter and HY 67bp tighter. At B+483bp, we were not far from our target of the 475bp level we suggested was possible into this recovery month for HY credit. IG credit had returned 1.4% in October and HY, as stated above, over 3%. The market has a good feel to it, and everyone is benefiting. Issuers will now come out in droves and try to get deals away, reassured that new issue premiums will diminish. Investors will be comfortable to take on risk, expecting deals to perform and happy to clip their bit of performance. With buyers content just to see a firm offer in secondary when primary isn’t so kind, dealers will be delighted to let whatever inventory they have go at 25-50c above screen prices, and gather some much needed P&L into year-end.

Average October in primary… A final flurry last week saw that October supply rose to around Eur13bn. The heavy issuance was much welcome and taken down with ease. The average over the past five years has been Eur15bn (Dealogic). Deals last week came from the likes of Deutsche Bahn in 15-year, Daimler, Autostrade, Autoroutes Paris, a dual tranche from Atlantia and, wrapping us up on Friday, Carnival Corp. SNS printed a LT2 with a call in 2020. Busy, busy, busy. All the deals were trading better on the break. As usual, it didn’t take long for borrowers to tighten up pricing – and quite aggressively in most cases. Books for deals were 3-7x oversubscribed and syndicate desks as usual took the opportunity to tighten deals up for their customers. We don’t think that there is much out there to interrupt the supply chain and we can look forward to a decent few weeks of issuance, most likely into mid-December. Thanksgiving will not close the primary market in Europe. Eur20bn+ of issuance for November would represent a good month.

Let’s hope that I haven’t jinxed it returning after my short break. It’s non-farms on Friday, we have US PMIs and a slew of earnings to look out for as well. On Sunday, China manufacturing PMI missed, coming in at at 49.8 indicating that the sector contracted again in October. Have a good week.

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.