15th September 2016

Phew, respite much needed!

MARKET CLOSE:
FTSE 100
6,673, +8
DAX
10,378, -8
S&P 500
2,126, -1
iTraxx Main
70bp, -1.5bp
iTraxx X-Over Index
330bp, -3bp
10 Yr Bund
0.05%, -4bp
iBoxx Corp IG
B+121bp, +1bp 
iBoxx Corp HY Index
B+428bp, -0.5bp
10 Yr US T-Bond
1.69%, -3bp

Steady on, old boy…

RelaxationThe markets got a little tedious, finally. Small moves in stocks, small moves in government bonds, the same in credit amid some much-needed consolidation following a couple of fairly difficult sessions. The questions, nevertheless, as we could expect are being asked. Is this the start of a tightening cycle? Are investors, who have been herded into over-stretched, long-duration positions going to feel the wrath of an almighty unwind? Can the corporate bond market continue its merry way in isolation versus risk-assets potentially unravelling elsewhere? No, no and yes/no.

We are not at the beginning of a tightening cycle but we do acknowledge a de facto mini-tightening on the back of the recent weakness in bonds. But we also remain bullish bond markets and think hat the recent weakness will be reversed in its entirety.

We still think that the 10-year Bund yield will see -0.10% before it sees +0.10% (currently at +0.02%). And the corporate bond market will continue to see good support for a while yet. The ECB (and BoE) is committed to asset purchases and as seen already with last week’s major grab by them (almost €2.5bn), they are potentially increasing their weekly shop thus bloating an already hefty balance sheet.

Primary still buzzing

National Grid was back, but this time with less gusto, choosing to access the euro markets for a benchmark deal of €750m, following on from Tuesday’s £3bn raid on the sterling market. Swedish Match printed €300m, BP looked at 8-year funding for €850m while St Gobain came with a shorter €1bn 3.5-year transaction (costing them nothing in fixed, that is a 0% coupon). That’s a decent gamut of issuance and takes the total for the month to €18.6bn.

We’ve had a few of €40bn+ months of IG non-financial issuance already this year where initially they were making up for the drought of January/February; We’re on track for another one. We’ve effortlessly zipped through €200bn YTD, and the next leg of funding, if it remains this heavy is going to opportunistic, feeding into that central bank bid where a frustrated and almost desperate investor is going to “happily” fund entities at ever decreasing spreads/yields. Final pricing on these deals, was well inside the initial price talk as we are now coming to expect.

The high yield market was not to be outdone, and there were several deals from the likes of Spectrum Brands, Intralot, Thom Europe, Edreams Odigeo and Lowell GFKL in various stages of roadshows, taps and pricing. Almost a billion was priced in the session. There seems to some life coming back into the HY primary market now, and these deals are following on from the two deals priced and launched on Tuesday. We happen to believe that the secondary high yield market will shine this year as the dual event of crowding-out and lower IG yields leaves investors seeking higher returns from this asset class. Returns here are around 7% YTD already.

Poised, but how delicately?

We won’t know if the lull on Wednesday sees us return to a prolonged period of calm now that a few have been shaken by the volatility, or whether expectations for a US rate hike have entered the psyche meaning we can anticipate a more jittery market into that meeting in a week’s time. There are a few data points before we get there, while we are not convinced that the employment situation and NFP reports of late are enough to warrant a hike. Whatever, we will find a our feet after it and while we can’t talk for equities, we are nowhere close to seeing the bottom fall-out of the bond markets (corporate and government bonds).

In Wednesday’s session, we closed out flattish in European equities and didn’t really threaten to do much else. Government bond markets fared better with 10-year Bund yields dropping to 0.02% (-5bp) while the equivalent Gilt also saw some support, down at 0.87% (-4bp). The recovery was broad-based across government bond markets.

As for credit, focus was obviously on primary, and while secondary was quiet we inched a touch wider for choice again. The IG Markit iBoxx index yield was left at 0.92%, helped by that rally in government bonds but is still 14bp off the lows seen a weaker so ago. We’re still heading for 0.70% for this index yield, in our view. Sterling credit was also a touch wider, the index left at G+149bp (+1bp), but that is understandable given the supply we’ve had recently. As if to confuse all and sundry, the HY market was in better shape, closing a smidgen better.

That’s all folks. Have a good day. Back tomorrow.

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.