1st December 2015

Taking the bull by the horns

MARKET CLOSE:
FTSE 100
6,356, -19
DAX
11,382, +88
S&P 500
2,080, -10
iTraxx Main
69.5bp, -1bp
iTraxx X-Over Index
289bp, -5bp
10 Yr Bund
0.47%
iBoxx Corp IG
B+151bp, -0.7bp 
iBoxx Corp HY Index
B+474bp, -2bp
10 Yr US T-Bond
2,21%

Some lead, others follow… Some are sitting and waiting, others are not. Well, Austrian utility OMV was straight out of the blocks with a dual-tranche hybrid deal and ISS Global with a plain vanilla effort. And these are the types of juicier transactions the market wants, almost craves. Because they offer yield. Well, it will crave them if Draghi duly delivers on Thursday, because underlying yields will be heading lower and the corporate bond market might revisit the sort of halcyon-like period it once enjoyed – like back in Q1 2015. Admittedly, it’s had a great run since the crisis began, but it looked like corporate spreads (index basis) were going to zero as high and low beta credit compressed à la Japan. That came on the back of the original QE announcement, having fretted on the prospect of deflation, zero rates, low yields and no growth to look forward to. And where the mattress beckoned, or the last great bastion in the fixed income market which offered some yield, the comfort of a very low default rate (and rating transmissions risk) and your money back at maturity – that was the corporate bond market. Sullied by the performance in Q2 and most of Q3 – where we pulled back hard on the back of a slowing China, emerging markets growth worries generally and the impact on global growth, higher US policy rates and a fair dollop of idiosyncratic event risk where all markets lost their way – we are now back. Those aforementioned worries haven’t left us, but we will rally if the ECB delivers later this week, and we will likely do exactly the same if the US raises rates later this month.

The market expects… It was a really strong session on Monday, and we can only think that comes off the back of huge expectations regarding further easing from the ECB. The quarter so far has seen some stock markets rise by almost 20% (DAX), and while some of Monday’s upside (+1%) might have been gained on the back of month-end position squaring, we still think it is all about the ECB. Fingers crossed that it’s not an ugly Thursday!

OMV finally bites the bullet… They waited as long as they could for better conditions (pricing), but finally bit the bullet and got dual-tranche Eur750m deals away. The PNC10 offered a 6.25% yield and the PNC6 5.25% in what appears to be one of the cheapest IG hybrid deals in the market. Combined books were a little over Eur4bn. The triple-B rated ISS Global came with a Eur500m no grow, 5.5-year offering which was finally priced at midswaps+100bp, and that was off the back of IPT of midswaps+115bp. The deals ended the month with some Eur26bn printed in the IG non-financial corporate sector (Dealogic data).

Secondary remains friendly… With stocks up as they were, credit was always going to be in decent shape too. Government bond markets didn’t really manage to rally into it. Overall though this is all about positioning in anticipation of a wide-ranging, all-singing, all-dancing ECB grab-fest announcement come Thursday. And although focus in the corporate bond market was on month-end valuations, portfolio tidy-ups and the deals in primary, we managed to edge better again in secondary markets.

That’s November over, we’re into the final chapter.. have a good December.

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.