5th October 2016

There’ll always be an England

FTSE 100
7,074, +91
10,620, +108
S&P 500
2,150, -11
iTraxx Main
73.5bp, -1bp
iTraxx X-Over Index
331bp, -1bp
10 Yr Bund
-0.05%, +4bp
iBoxx Corp IG
B+126.3bp, -0.5bp 
iBoxx Corp HY Index
B+440.7bp, -2bp
10 Yr US T-Bond
1.68%, +6bp

The United Kingdom glows…


Good times: Britain is in great shape … notwithstanding the value of the pound.

The United Kingdom is rocking in the afterglow of the referendum vote to leave the EU. The currency has been hammered (and likely going lower), but that drop has boosted stocks (and they’re likely going higher).

Gilt yields have fallen hard although seemingly found a floor at around the 0.70% level. Construction activity is growing again while manufacturers are enjoying some sort of honeymoon period.

The FTSE is back though 7,000 for the first time in 16 months and the corporate bond market (issuers and investors) are thanking their lucky stars that QE has reduced funding costs and boosted returns. The Italians (and others for that matter) will be looking on in envy.

There’s method in the madness, and it might unravel at some point (inflation, sustainable growth, higher yields and rates) – but that quartet possibly acting out in sync isn’t going to happen anytime soon. Meanwhile, the Eurozone chugs along – yesterday’s session seeing producer prices back in deflation, although we saw some stability in Deutsche Bank’s share price and thereby avoided “that” headache.

In credit, there was nothing in primary again as far as non-financial IG is concerned. Where have all the borrowers gone? They have a clear path to get deals done for a couple more sessions yet, and ahead of the non-farm payroll report on Friday. But all we got were several senior bank issues, covered bonds and SSA deals. It’s not exactly the bright start to the final quarter from an issuance perspective, nor would we have expected this to have been the case.

Other news, supportive for corporate bonds, saw S&P release their September default report. They reported that the European default rate was unchanged at 1.9% while the transition ratio (upgrade/downgrades) saw that upgrades exceeded downgrades. Meanwhile, eight defaults saw to it that the 12-month trailing default rate in September increased to 5.0% in the US, from 4.8% in August. Excluding the energy sector, the rate was 2.4%. Downgrades (45) exceeded upgrades (16).

ECB still lifting at a hefty pace

The weekly shop by the ECB for corporate bonds as part of its QE asset purchase programme saw €1,854m taken down last week, and the total after 16 weeks to €29,722m of purchases. That represents a drop of almost €500m versus last week and comes after exceeding €2.3bn per week on average for the previous 3 weeks.

We won’t hold that against them with the weekly average still exceeding €1.8bn. It has to be only a matter of time before this translates into squeezing the secondary market materially tighter. It has to. Effectively, they have taken nigh on €30bn of non-financial IG-rated corporate debt permanently out of circulation.

16 full weeks and almost €30bn acquired

UK PLC riding high, taper tantrum elsewhere

The FTSE was the winner in the session – pound sterling the loser. Gilts also gave some back as did the Bund and most other government bonds. On a book almost 4x oversubscribed, Italy issued its debut 50-year bond funding at 2.8% for the duration of it. Desperate times we think, because it isn’t a particularly great deal to enter/lock into.

Still, asset-liability matchers will have been all over it, with little choice but to be. As suggested earlier in the day by Gross (and us previously), “it can’t end well”. The question is, when? The structural changes that need to be made are not being made. And if they ever are, they will take time to filter through. Until then, it will pay to play the game – and we will be playing that game for a good while yet. When the pain comes, we will all suffer – as one.

Reports surfaced late into the session that the ECB would be looking to reduce their QE purchases after March (and not extend or increase them as expected) and that saw some sell-off in govies. We don’t believe it – it is almost laughable. However, if true, there is going to be some serious pain from now on, while we all know the question Draghi will be facing the next time he is asked one! For sure, he will play it with a straight bat. With some seeds of doubt now planted in t e minds of investors, the 10-year Gilt yield closed at 0.78% (+5bp), the equivalent maturity Bund yield at -0.05% (+4bp) with BTPs at 1.30% (+4bp) and Bono yields up at 0.97bp (also +4bp). The FTSE was closing in on record territory, through 7,000 at 7,074 and the DAX was up 1% at 10, 620 – but still in the red for 2016.

In credit, the market was better bid but we only closed marginally better. As measure by the Markit iBoxx index, spreads were at B+126.3bp (-0.5bp) with similar moves in the HY market leaving the index at B+440.7bp (-2bp). Activity levels were light. Index didn’t move much with Main at 73.5bp (-1bp) and X-Over at 331bp (also -1bp). The US was closing with stocks in the red, which means we will likely open weaker today.

That’s it. Here’s hoping we get some supply today. 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.