17th September 2015

Sock it to me

MARKET CLOSE:
FTSE 100
6,229, +92
DAX
10,188, +56
S&P 500
1,978, +25
iTraxx Main
70.5bp, +-2bp
iTraxx X-Over Index
324bp, -9bp
10 Yr Bund
0.77%
iBoxx Corp IG
B+148.3bp, -0.5bp 
iBoxx Corp HY Index
B+473.8bp, +2bp
10 Yr US T-Bond
2.29%

The 25bp isn’t the issue… What the subsequent communiqué dishes up will matter more. Still, it won’t mark the end of the multi-year halcyon period for the corporate bond market in Europe. We should be focused on the eurozone inflation figure, which came in lower than expectations at 0.1% for August – and we suspect more than a few corporate bond market investors were inwardly warmed by it. I know I was. That sort of figure suggests that the ECB has more work to do and that an extension of the current asset purchase programme in longevity and scope is a fait accompli. Treasury and Bund yields are most likely going to see more divergence should the Fed raise rates. The latter yields have been dragged higher in the last session or two as Treasuries sold off, but we suspect the link will become more tenuous into the next few months. And the need for yield in European fixed income means more demand for corporate bonds. The corporate market has become bit of a safe haven in the past few years, boosted by systemic liquidity creating an easier refinancing environment, and leaving a supportive rating transmission dynamic and extremely low default rates. The headlines in this low-growth era have been surprisingly kind to corporate bonds and will continue to be so as liquidity works its magic for a while longer. The persistent low-inflation environment also makes a folly of the past several months of weakness in corporate bond spreads, which have now hit 18-month wides. We are looking at a fantastic opportunity to add some cheaper risk here.

No longer a hidden subliminal message… August CPI fell in the US (-0.1%) and just adds to a myriad of indicators which are sending out contrasting signals. There is no, low or negative inflation, depending on which definition one chooses. We have tight labour markets in the US and UK, but sluggish wage growth. Nearly every month we are surprised by solid industrial production numbers from Germany. Now the OECD is downgrading its global growth figures. That concoction is such a mish-mash of ingredients that policymakers are having to contend with, it’s no small wonder that playing it safe with loose policy is seen by most as the best option. So get on with it, the message is hardly subliminal any more. Buy corporate bonds.

Closed for business on Thursday… We were effectively closed on Wednesday too, with nothing we could really get excited about on the primary front. LeasePlan was the closest we got to an IG non-financial corporate, and the most noticeable thing about the deal was the smaller coverage ratio (in the 2-3x range) for the Eur500m, 3-year offering. Low triple-B rated property group Akelius’ Residential rounded off this pre-Fed issue-fest with a Eur300m, 5-year transaction. There was the usual smattering of unexciting covered and senior deals, while the ESM took 10-year funding. S&P slipped in a one-notch downgrade of Japan’s sovereign rating to A+, bringing it to the same level as Moody’s rating (A1).

And the rest… On the surface we sat through a good session, as the markets were spurred on by a good ol’ rally in equities. Over 1% in most bourses saw to it that credit was going to better bid for choice. Nevertheless, the iTraxx indices were better offered, cash though recovered just a little of the recently lost ground but the crop of  ‘cheap’ deals in primary were on the front foot. Fickle, but then it always is. We’re probably done as far as the heavy lifting is concerned from a business perspective for this week. The Fed later will effectively leave us with a long weekend in which to ponder how we will close out the quarter and the year.

Our thanks to all those who voted in our Fed rate poll. Over 70% of respondents think that there will be no hike tonight.

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.