23rd May 2016

Sell in May? Too late..

MARKET CLOSE:
FTSE 100
6,156, +103
DAX
9,916, +120
S&P 500
2,052, +12
iTraxx Main
78bp, -2bp
iTraxx X-Over Index
332bp, -5bp
10 Yr Bund
0.16%, -1bp
iBoxx Corp IG
B+148.6bp, unch 
iBoxx Corp HY Index
B+502bp, unch
10 Yr US T-Bond
1.84%, -1bp

After all that, a day of rest…

dell

Huge: Dell’s $20bn deal

There were not many obvious winners last week, but corporate borrowers both sides of the Atlantic were up there as one group of them which were. Dell’s mega launch in dollars and the €11bn of IG corporate bond issuance here fed into the frenzy that comes with a search for yield. And that’s even if rates in the US are soon to be going up.

Corporate bond market investors in Europe may have have shied away from longer dated debt leaving LafargeHolcim in a position where it was forced to pull a longer-dated deal, but we think that this is a temporary phenomenon after the US Fed minutes seemingly moved the goal posts. We put it down to bad timing and/or bad luck. After all, few were going to adding serious duration after the publication of those minutes suggesting a June rate hike was highly possible led to much weakness at the long end. Secondary is doing very little, such is the intensity of the focus on primary. Relative value as we once knew and loved has had its day. The directional trade and scramble for anything (almost) primary is now the name of our game. As a result, there’s no more rocket science in the investment process as we just blindly follow the trend and join the herd.

It is, though, a borrowers market. The €11bn of non-financial debt issued last week took the May monthly total to €37.3bn and just €1.5bn short of a record level of issuance for any May. We’ll get there perhaps by Tuesday this week, needing a couple of borrowers to get some funding in.

Finely balanced everywhere

The month’s performance all hangs on how we trade through this final week of it. For stocks, the S&P index at 2,052 is barely back in the red year-to-date (+0.5%), while they’re down 0.5% so far for this month. The DAX has lost 1.2% this month while it is losing 7.6% for the year so far. Equities have a hard time of it all year and the positives that may have previously come with earnings being buoyed by cost cutting, share buybacks (in the US) and low rates have now run their course. We need signs of sustainable growth as a driver for corporate profits which would then take away the fixation we currently have on US rate dynamics (and potentially higher borrowing costs). We would think that equities will continue to feel their current strains for a while longer.

Bond yields are a difficult beast to call in terms of direction. We’re pretty much parked in negative yield territory out to 10-years and there has been some massive demand for longer-dated government bond risk as witnessed by the 50-year and 100-year bond issues. Yield remains the name of the game and insurers have been scrambling to get that income to satisfy their guaranteed contract payout requirements (these are long duration products sold several years ago when base rates were a lot higher).

Federal Reserve

Fed Up: Indications of a June US rate hike

With the Eurozone perennially in the doldrums, and the ECB having raised the ceiling of their bond purchase programme to €80bn per month from €60bn, then we ought to expect yields in government bonds to move lower. For the moment, the “shock” news last week of a possible US rate hike next month has won over in the contagion stakes. Nevertheless, we are still looking for the 10-year Bund yield to close in on negative territory (others will move lower too), from the current 0.16% yield.

In credit, we close for business when the going elsewhere gets tough – as it did last week, which is no bad thing. To a large extent the European credit market is becoming immune from the day-to-day machinations of equities, commodities and government bonds. Unless, of course, there are some event-driven, very big moves. That said, we have backed up in spreads but the move is relatively small and is noise in the grand scheme of things. That’s testimony to the new found resilience of the corporate bond market and comes as a direct result of the ECB’s upcoming corporate bond purchases. Few dare to sell, because they will be kissing those bonds goodbye if they do.

Primary having the best of it

Primary markets have been on a roll. Supply for May will hit a record today or tomorrow for the month, and if we get a (couple of?) multi-tranche issues we’re on for the month being an all-time record (see above). The pipeline is decent and should we get some calm this week in the markets – which is possible – before those rate hike jitters resurface as we head into early June, then we could be in for a busy week.

As measured by the Markit iBoxx index, spreads closed a touch wider in IG and a little better in HY. The former obviously seeing some of smallest of pressure coming from the heavy supply in primary, while we gain comfort that the HY market has show no weakness despite the volatility in equities (usually a close correlation between the two).

We’re light on data into this month-end period, with some focus on the G7 gathering, while Yellen will be on the wires – but not until Friday. US durable goods orders for April are also slated for Friday as is US Q1 GDP. The decks are clear for most of the week, time to rearrange the chairs.

That’s it. Have a good start to the week, 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.