2nd February 2016

Potluck Tuesday

MARKET CLOSE:
FTSE 100
6,060, -24
DAX
9,758, -40
S&P 500
1,939, +-1
iTraxx Main
93.25bp, +2.5bp
iTraxx X-Over Index
370bp, +5bp
10 Yr Bund
0.35%
iBoxx Corp IG
B+173.25bp, -1bp 
iBoxx Corp HY Index
B+588bp, -7bp
10 Yr US T-Bond
1.95%

Chapter 2: No change of direction… Not yet anyway. The saga continues and we are running with the same storyline. We opened with weak Chinese (and other Asian) manufacturing data and lower Chinese stocks. Weak – or rather mixed – manufacturing data in the eurozone later meant that it was a case of lower stocks in Europe too. A nudge for the ECB if ever there was one. In anticipation, we saw intra-day record low bond yields again for 2, 5 and 7-year Bund yields (all negative) and the 10-year inexorably heading the same way lower (admittedly, it has a way to go get to 5bp). Oil prices moved lower, but are no longer dictating market sentiment or direction like they did through most of January. It’s the economy – the dire state of it – and the ECB’s next meeting that are weighing on markets. There will also be an eye on US data this week (January factory orders came in lower than expected) and in particular on the non-farm payrolls on Friday. There’s a way to go, but we do not believe the Fed will not move at its next meeting. Corporate bonds might have opened slightly better, but they faded any hopes of holding onto those gains to end flattish at best. Primary was closed save for some covered bond issuance, and we are yet to see an IG deal since Mondelez’s transaction over two weeks ago. We can’t afford February to be as barren a month as January was – surely not. We barely saw €5bn printed in IG corporates in January, and another low figure for February will be hard to swallow for those syndicate desks, investors and issuers alike. If macro instability doesn’t subside, we would think that bravado will be put to one side and not wanting to be damned, corporates will print. US giant United Technologies (A3/A-) announced roadshows for next week ahead of an anticipated deal, while WFS Global and Onorota Arm (both HY) announced roadshows for this week. Honeywell, Amgen and EasyJet are also due at some stage. US borrowers accounted for 26% of last year’s total Euro-denominated IG supply (15% is the long term average) and they’re promising to be as prevalent again this year. Right now, that’s just because there’s a lack of activity from european based borrowers.

Telling you how it is… While we wait for the markets to reopen, let’s revisit a bugbear of many, the merits of the allocation system for new issues in the primary market. There’s no pleasing everyone. It has long been thought that the system is unfair, and, in these much expanded markets, especially for the ‘little’ guy. Can the system be altered to make it more fair, or has it evolved in a such a way that we’ve reached an optimal process? Someone is always unhappy. Be that anyone (a large or small account) who receives a “poor” allocation (less than they wanted), or who received a ‘full’ allocation in a deal that subsequently didn’t perform. Most would agree wholeheartedly that ‘large’ accounts receive better treatment. Mind, they are a reliable participant for most deals and they do have more skin in the game. That is, dependability. A ‘trading account’ will rarely be content with a poor allocation, as the modus operandi of their interest is to flip the bonds for a quick turn. Secondary trading desks usually have a gripe too, even though they are not directly involved in the process, complaining that liquidity disappears due to firmly held new issues and an insufficient or non-existent (these days) free float. Syndicate desks and “supportive/supported” accounts will be of the opinion that those who give early orders deserve better treatment due to the value (reliable support) they bring to a transaction. And let’s not forget the borrower! Frequent borrowers like to have an input into the allocation process in order to achieve better diversification and fill buy-and-hold investors. The allocation system will never keep everyone happy, and we are always are left relying on syndicates to do the right thing for the deal – to keep the borrower and as much of the investor base as possible happy. Order inflation is a problem too. It does go on. The size of the book – not the communication of it – is also a potential problem. As it builds, more want to get involved and are likely to inflate orders so that allocations are better for a deal which is a ‘gimme’ transaction. Better allow no inflated orders, no formal communication of the book and maybe a platform whereby we can see who has put in for what. That is, let’s be more transparent.

Softer markets and the ‘dip’ just goes on… Equity weakness weighed a little on the corporate bond market in a fairly quiet but choppy session. European stocks started the month just as they began January – weaker. Few if any are “buying the dip”, because the dip just keeps going. Bon courage, as they say! The DAX shed 460 point on the opening session of January (-4%), but recovered off being 1.3% down to close just 40 points lower on Monday (-0.4%). The 2-year Bund yield visited -0.49% (a record low) and the 5-year -0.32% (also a new low), but they ended at -0.47% and -0.29%, respectively. The 10-year dropped to 0.31% early on but came back to close at 0.35%. Peripheral yields fell 2-3bp initially only to rise by 5-6bp into the close. Oil was down on average by 5.5% between Brent and WTI, the former left at $34.1 per barrel. The Markit iBoxx IG corporate bond index closed out a basis point tighter at B+173.25bp on this new index rebalancing day while the HY index was 7bp tighter at B+588bp. The synthetics were weaker, with Main up at 93.25bp (mid) and X-Over better bid at 370bp. US stocks closed unchanged and treasuries gave up a few basis points in yield. After the close, Shell wad downgraded to A+ from AA- from S&P, with CreditWatch Negative assigned to the ratings of BP, Eni, Repsol, Statoil and Total. Staying with commodities, BHP was downgraded to single-A from A+ and could go lower unless it abandons its current seen as aggressive dividend policy. We shouldn’t be surprised by the ratings actions and would expect little price action as a result.

Who know’s what today holds. Try and 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.