4th October 2016

Respite

MARKET CLOSE:
FTSE 100
6,984, +84
DAX
10,511, closed
S&P 500
2,161, -7
iTraxx Main
74bp, +1.5bp
iTraxx X-Over Index
335bp, +5bp
10 Yr Bund
-0.10%, +3bp
iBoxx Corp IG
B+126.8bp, +0.7bp 
iBoxx Corp HY Index
B+442bp, -4bp
10 Yr US T-Bond
1.62%, +3bp

Germany gives us all a break…

german-unity-day

Unity Day: German public holiday kept things quiet

There was a lot to think about on the opening session of the final quarter. This included some upbeat manufacturing data from the Eurozone and the UK for September, later added to by some cheerful factory data from the US.

There was also relative calm around Deutsche Bank with CDS/bond prices moving higher/lower in moderate fashion, while big is now beautiful in the asset management world as Henderson and Janus Capital announced merger plans.

The tone was one of reflection and therefore mixed for risk-assets as equities played out in no-mans-land (Germany closed) and government bond prices edged lower. In the UK, stocks ratcheted higher on a weaker sterling.

There was little talk by way of an impending systemic financial crisis which had previously gripped the markets – but we know that can emerge anytime – on a spurious report or a misplaced comment (or otherwise) from a figure in authority around Deutsche Bank.

In all, we will take the session for what it was, given that there was little altercation anywhere and so it was much welcomed after that hair-raising second half of September. We had little by way of supply, save for a sterling deal from Gatwick Funding. With Germany closed there was never going to be much by way of primary activity anyway, such is the importance of the participation from the German investor base to the corporate bond market.

A quick recap sees IG non-financial issuance up at around €215bn for the year so far (€30bn last month) and we are looking, as we suggested in Monday’s note, at around €270bn or so to get done by the time we close out 2016. That won’t be a record, but it will be the second best year for issuance should our expectations/forecasts be met.

There was no release of the weekly ECB shopping list of corporate bonds owing to the holiday in Germany, but it will be announced later in today’s session.

In secondary credit, Markit iBoxx index spreads at around the B+126bp area are illustrative of much disappointment of late, where we believe the ECB’s new average weekly lift of €2.5bn ought to have seen us ratchet tighter. Something’s amiss given that the ECB is not – or no longer – picking the low hanging fruit. With the easy lifting done weeks ago and the average takedown increasing, we should have been looking at a cash index spread materially lower than where it is marked right now.

Our year-end target of B+100bp (the index started 2016 at B+154bp) is not going to happen. Still, returns for the asset class are at an encouraging 6% for 2016 thus far; there is still cash coming into corporate bond funds with little going the other way and we should at least remain well-supported through the rest of this quarter.

And the rest?

Oil

Brent Crude Oil was up over $50 per barrel again

Well, oil as priced by the Brent contract, was through $50 per barrel again on hopes of an OPEC deal to cut production –  while sterling took bit of a bashing, dropping to trade off a $1.28-handle. Bund yields rose a little to -0.10% (+2bp) while the equivalent 10-year Gilt yield went the other way and dropped to 0.73% (-1.5bp).

The periphery took a little more pain, with BTPs yielding 1.24% (+5.5bp) and Bonos off their record lows at 0.91% (+3bp) as we rounded off the session.

In credit, the secondary market was slightly better bid with IG and HY cash a little better in the session with little flow and real interest by investors to get involved. As for the better sentiment towards cash corporate bonds, the iTraxx indices suggested otherwise, with the synthetic indices wider leaving Main (+1.5bp) and X-Over (+5bp) both higher.

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.