20th July 2016

Summer lovin’

MARKET CLOSE:
FTSE 100
6,697, +2
DAX
9,981, -82
S&P 500
2,164, -3
iTraxx Main
71.5bp, +0.5bp
iTraxx X-Over Index
329bp, +3bp
10 Yr Bund
-0.03%, -1.5bp
iBoxx Corp IG
B+130bp, -1.25bp 
iBoxx Corp HY Index
B+468bp, +0.5bp
10 Yr US T-Bond
1.55%, -3bp

Food for thought…

The European Commission’s latest forecasts for growth paint a difficult picture for next year, and while we agree with broad post-Brexit related sentiments, it does set the scene of what we should expect for the rest of this year and likely most – if not all, of 2017. Depending on which scenario analysis one looks at, the EC thinks that the Eurozone will see between 0.2-o.5% lopped off growth for 2017. That means growth of 1.3% in 2017. The IMF was also out with upgraded forecasts, shaving a little off previous global growth expectations for 2017.

And the net markets impact? Well, expect more easing from the ECB – via another rate cut (deeper into negative territory) and/or an expansion to the current various bond purchase programmes. And we all know what that implies for government bond markets (lower yields) and corporate bond markets (lower yields/spreads). For now, we let the process of the ECB’s mega grabfest play out supporting the corporate bond market over the summer months as the unlimited buying power of the central bank sucks the life out of the market.

yapi_kredi_bankasi

Pulled deal: Turkey’s Yapi ve Kredi Bankasi

The first corporate bond market victim of the failed coup in Turkey was Yapi ve Kredi Bankasi which pulled a dollar-denominated deal – after pricing several days ago and which was to settle in yesterday’s session. That is very unusual dynamic in itself, but completely understandable. Erdogan is now purging the judiciary, academics and others and one has to fear what will come out of it. No wonder the Turkish lira got pummelled. They’re the “have nots”, while the “haves” are those non-financial borrowers in the Eurozone who may be looking at some stage to get funding done. They can print at will – and at a price of their choosing, almost.

The interesting medium-term point will be how the ECB’s participation in the market will see a push-down effect such that investors are forced to move so far down the credit curve that the HY market returns to the halcyon days of 2012-2014, with more record issuance. Those sluice gates are yet to open this year. The jury is out for the moment, but it is early days. Maybe the ECB will fail in the attempt, as investors start to pull out of the corporate bond market. That’s worth thinking about. Reduced yield, disproportionate risk taking, manipulated market and storing up massive downside when (or if) the market turns. Why bother?

A mixed day elsewhere

The German ZEW index (a barometer of economic sentiment) came in much lower than expectations (-6.8 vs expectations of 9 and 19.2 in June) – and they blamed it on the Brexit. German stocks were lower for most of the session but did manage to trade off the earlier low points by some margin though the afternoon session. US data continued to point to a decent economic outlook as June housing starts beat, Goldman and J&J earnings topped estimates and for good measure, Monsanto is trying to squeeze every last drop it can from Bayer as it rejected the company’s latest revised offer. US stocks were a little lower through the session, Eurozone bourses 0.6-0.8% in the red and the FTSE was left at around flat with sterling a little lower at $1.314.

Government bonds were slightly better bid through the session. The 10-year Bund yield edged a basis point lower to -0.03% while the equivalent Gilt yield was 3bp lower at 0.80%. US Treasuries also rose with the 10-year yielding 1.55% (-4bp). Oil hasn’t been in the news of late and has been left trading at around $46/47 per barrel over the past week or so.

teva

Great expectations: Teva

In the corporate bond market, we had another day of zero issuance in IG non-financials, although the market is expecting Teva’s multi-tranche M&A funding to hit the screens in today’s session. It’ll probably be the only decent one for the week and we have to think that there is going to be very little thereafter until September. Anyway, we did get Wells Fargo in sterling in senior funding. On the news flow front, Deutsche Bank’s triple-B rating was put on negative outlook by S&P, while the European Court of Justice ruled that junior debt “bail-ins” were legal (in the case of Slovenia), delivering a potential blow to Italy’s efforts to restructure its banking sector.

But credit’s juggernaut rolls on

As for spreads, they moved tighter in the investment grade market – simple as that. The Markit iBoxx IG corporate index was a basis point lower at B+130bp, while the index yield declined to a new record low of 0.95%. They’re inching towards the targets we have of 0.70% for the yield and B+100bp for the index spread. A lot will happen in that sense during the next 6 weeks, because while many participants are holidaying, the ECB will just keep plugging away. This machine never stops.

Surprisingly perhaps – or there is just no focus on the market, the HY index closed 0.5bp wider (B+468bp). The move wider was just noise, activity was light and volumes very low. But we think that sooner or later, there is going to be more interest in this market and performance will pick-up accordingly. The synthetic iTraxx indices closed with Main at 71.5bp (+0.5bp) and X-Over at 329bp (+3bp).

And that it about it. Teva’s 4-trancher will keep us occupied today, if it comes as expected. Have a good day.

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.