16th September 2016

Snip, snip short lived

MARKET CLOSE:
FTSE 100
6,730, +57
DAX
10,431, +53
S&P 500
2,147, +22
iTraxx Main
70bp
iTraxx X-Over Index
332bp
10 Yr Bund
0.03%, +1bp
iBoxx Corp IG
B+121.5bp, +0.4bp 
iBoxx Corp HY Index
B+437bp, +3bp
10 Yr US T-Bond
1.70%, unchanged

My crystal ball says more cuts coming…

After those comments from the BoE – that is, the potential for another rate cut – one has to think that the recent back up in yields in the UK and Eurozone are unwarranted. Peeping over the parapet, the UK’s central bank must see that storm clouds are potentially gathering. By extension, we believe the ECB will be seeing the same and they will also be implementing some form of further easing, shortly. Reason enough, we believe, to think that the recent sell-off in government bonds is unwarranted and that we will see yields heading lower again in some sort of sustained fashion.

It is as if we have taken our eye off the ball here, focused on what’s happening in the US and trading as if the correlation with the US has retained its historical trend. We should all be aware that the years of central bank meddling in markets has led to a breakdown in the correlation. The muddied waters should offer opportunities to those who have a more bearish stance on the macro outlook.

Swiss Life

Swiss Life: Perpetual subordinated deal

We might have had a couple of days of heavy issuance and got all excited about it into expectations of a blockbuster month for supply. We might still get that, but it looks like primary ran out of puff. Just Deutsche Bahn came with a 12-year deal on books barely covering the nominal – it was, after all, their fourth deal this year, is extremely rich and would appeal to rate players than pure corporate bond investors.

The pipeline is still looking very good (more deals announced in the session) and we can expect a regular level of issuance through this month. Swiss Life gave the yield hogs something to cheer about with a €600m PnC5 at midswaps+410bp.

€19.1bn of IG non-financial issuance has been issued this month so far and we still have two weeks worth of business to get through. We would think that €40bn+ is a reasonable target for September and, should we get there, this would be the third time this year monthly IG non-financial issuance would have exceeded/reached this figure. The demand for that level of issuance is clearly there.

The ECB assures that it will stay as such for as long as they are involved. Performance has been excellent for corporate bonds this year and so more money will keep arriving looking for some of it. Small wonder our market has felt the wrath of any market backlash seen clearly in equities and government bonds of late.

Touch and go on US rates

Federal Reserve

US data points to a rate hold

The flurry of data would suggest that “hold” wins out. US industrial production fell in August by 0.4% versus a forecasted 0.2% rise. Retail sales also fell, by 0.3% versus expectations of a 0.1% decline, while producer prices were flat against expectations of a 0.1% rise. In the face of that and other data points of late (employment apart), one would have to expect the Fed to hold off at next week’s FOMC.

Government bond markets reacted with little enthusiasm to it, and ended the session a touch weaker. That meant 10-year Bund yields edged to 0.03% (+1bp) and the equivalent Gilt to 0.89% (+2bp). Italian 10-year BTPs are up at 1.33% (+4bp) which represents a fairly decent pullback after being down at almost 1% just over a week ago. Bonos are faring better at 1.07% (unchanged).

US equities cheered the data – hoping for lower rates for longer. We caught a late bid here too and managed to close in the black by up to 0.5% in the Eurozone, while UK stocks had a decent session throughout and closed 0.9% higher. Oil prices crept higher too, with Brent firmly in the high $46 per barrel area.

In secondary corporate credit, we edged a touch wider again in IG, but that is 4bp wider in the week and admittedly against expectations. Flows and volumes were light but maybe we have drifted wider because of the supply (unlikely) or the weakness elsewhere . The story was the same in HY with spreads 3bp wider on an index basis (market iBoxx).

So, overall, a jittery week, but not too indecent for the corporate bond markets. It should be a quiet session today, but we ought to be on the up given the 1% rise in US stocks.

Have a good weekend. Back Monday.

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.