25th November 2016

For some, a Thanksgiving feast

FTSE 100
6,829, +11
10,689, +27
S&P 500
2,205, closed
iTraxx Main
81bp, unchanged
iTraxx X-Over Index
341bp, unchanged
10 Yr Bund
0.25%, -0.5bp
iBoxx Corp IG
B+139bp, unchanged 
iBoxx Corp HY Index
B446bp, +2.5bp
10 Yr US T-Bond
2.35%, closed

The ECB warns…

Trump alert: The ECB fears instability

ECB: Potential instability from Trump policies

The ECB used its financial stability review as a means to mumble about increasing risks to the economic outlook. Whilst delighted with the resilience of the Eurozone to recent events – and particularly the response to the potential risks from the UK referendum – the bank highlighted Trump’s election triumph and the forthcoming Italian constitutional reform referendum (amongst others) as now posing considerable political and economic risks.

Government bond yields have risen everywhere (which is also unhelpful), however it is the 100bp+ rise in the 10-year BTP yield in Italy with contagion impacting Spain and Portugal which will be giving policymakers much food for thought.

It’s not as if structural, fiscal and other reforms are high on the agenda or even barely noticeable in many Eurozone countries, but higher market rates are going to squeeze their ability to throw any more significant amounts money at their problems. In a sense, the Italian referendum is crucial now given that should Renzi lose, the subsequent “turmoil” will see the ECB potentially spring into aggressive action several days later. We happen to think that whatever the result in Italy on December 4, that the ECB will anyway prolong its current QE programmes for at least another 6-months.

In a very limited session (flow-wise), we at least had time to digest the latest economic data, which in yesterday’s session saw that German growth had slowed to 0.2% in Q3, from 0.4% in Q2 and a sprightly 0.7% in Q1. So quarter-on-quarter declines through 2016, but Q4 is expected to show a decent rebound. That’s all good, then. And for what these reports were worth, German business confidence edged a touch lower while consumer confidence edged a little higher. It was more that the US was closed that the markets traded in very tight ranges throughout the session and really didn’t threaten to do much else.

Deals galore

A newsworthy €500m deal came from ITV

A newsworthy €500m deal came from ITV

In corporate credit, however, we had several deals to contend with. It was actually a decent day for issuance. ITV plumped for 7-year funding and €500m of debt, Iberdrola issued a Green bond maturing in 2024 for €750m while Italy’s Autostrade clipped €600m in a long 10-year offering. Books were between 1.5-3.5x oversubscribed and deals tightened by 5-18bp with Autostrade at the bottom end of both of the aforementioned technicals. So €1,850m of issuance in the session leaves us with €5.3bn printed this week, but there is the potential for something to pop up today.

For the month so far, that’s €21,925m from IG non-financial corporates, and we can look for €25bn of issuance in total at least, before we close out the month next week. Other deals saw a combined €800 issued in senior financials from Arion Bank and BNP, the latter in the form of a Green bond. The high yield market, where the pipeline is bulging drew a blank.

Closing out the week early?

The BoE’s QE effort in the sterling corporate bond market added £400m last week, with the total holding now standing at £3.47bn. Given the overall size of the market and the need for various parties to hold fixed income debt (for ALM purposes and the like), it’s no wonder that the sterling corporate bond market has held up very well into the recent weakness in Gilts and choppiness around equity markets. The market closed unchanged yesterday, the cash iBoxx index at G+160bp.

There was a moderately better tone to the markets with equities a small up, government bond prices a little better too and secondary corporate spreads completely unchanged. The Markit iBoxx index closed at B+139bp for IG corporates.

The story for high yield wasn’t quite the same. Secondary was a little weaker which left the cash index up at B+446bp (+2.5bp) in a lacklustre session. iTraxx Main and X-Over ended unmoved, at 81bp and 341bp, respectively.

Happy shopping. Back on 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.