9th September 2015

Just saying how it is

MARKET CLOSE:
FTSE 100
6,146, +72
DAX
10,271, +163
S&P 500
1,969, +48
iTraxx Main
71bp, -1.5bp
iTraxx X-Over Index
330bp, -5bp
10 Yr Bund
0.67%
iBoxx Corp IG
B+143bp, unch 
iBoxx Corp HY Index
B+466bp, -2bp
10 Yr US T-Bond
2.19%
Boring is good… Investing in corporate bonds was never meant to be an enthralling or captivating pastime. Yet we make it so, and over the past few years we have gotten all cock-a-hoop when greeted with a flurry of issuance. Poor secondary market liquidity means that the ability to trade (in size) at a reasonable price has been lost on us. So the scramble to get bonds on board in primary – the adrenalin rush which comes from winning a mandate, the high-fiving when IPTs are tightened up and the relief for borrowers that deals are launched without too much or even any altercation, is palpable. But really, it ought not to be that melodramatic. For investors, buying corporate bonds ought to be for the long term: buy, hold, clip the coupon and move on to the next deal. Yet they worry about liquidity, allocations, a basis point of movement on the break which might go against them. Event risk through M&A, releveraging and say jump-to-default ought to be the major structural worry. For regular borrowers however, the process has become somewhat mechanical, while the opening up of the corporate bond market since the crisis (central bank easing, low yields, copious liquidity) has created a depth and breadth where even non-frequent borrowers are now able to raise monies without too much fuss. The euro-denominated market is now a Eur2tn one, up from around Eur700bn some seven years ago. We have critical mass, and certain processes are becoming more mechanical. Syndicates play their part, but soon enough that role might possibly start to diminish. Time and more maturity will tell.

Up, up and away… Chinese imports may have fallen hard, but German trade figures dominated on the macro front giving the markets a filip to trade better. Equities in Europe traded up by over 1%, credit edged tighter and the iTraxx indices were better offered (lower). We had some issuance into the improved tone, although only Swisscom’s issue (A2/A) was of real note in the non-financial sector as the issuer came with a Eur500m, 10-year at midswaps+80bp (and a huge 15bp tighter than the initial price talk). Why bother with the huge initial premiums? After all, the demand is there, it’s not rocket science. And as mentioned above, with respect to less frequent borrowers able to get deals away, Finnish shopping centre group Citycon was on the screens for Eur300m of 7-year funding at midswaps+175bp (mid-triple rating), offering a decent 10-15bp premium.

Secondary spreads go with the flow… Secondary markets have seen much more limited activity for what seems like an age and this session was no different. Still, they delivered what we expected in line with higher equities. Spreads moved tighter. And so the week which began very modestly on the front foot continued with us edging very slightly better. It left the broader indicator of the market, measured through the iBoxx index, at B+142.9bp and barely better, but higher beta sectors did record some upside in Tuesday’s session. Once could argue that the machine has to slow – it has, and the FOMC is looms large.

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.