19th November 2015

…the tough get going

FTSE 100
6,279, +10
10,960, -11
S&P 500
2,084, +33
iTraxx Main
70bp, -1bp
iTraxx X-Over Index
294.5bp, -2.5bp
10 Yr Bund
iBoxx Corp IG
B+152.5bp, unch 
iBoxx Corp HY Index
B+480bp, -1.5bp
10 Yr US T-Bond

The going was about to get good… As ever in these markets, we don’t seem to get much traction for more than a day or two. Equities have a blinder one day, then a seemingly much-needed rest. Government bond markets rise and fall to the tune of the headlines and what might be thought to have an impact on the thinking at the Fed and the ECB. Commodities are not quite in a world of their own, but are deeply attached – as one would expect – to what is happening (or going to happen) in China. Credit continues on its merry way. We tighten – usually – when stocks rally; we are sidelined when they sell off. Even the traditional flight-to- quality trade has bypassed the corporate bond market. It should not. Credit ought to be viewed as the ‘quality’ in ‘flight to quality’, but old habits die hard. We should not be surprised there. Investors just seem happy to pay for Bunds: the 2-year yield was at a record low of -0.38% again today (also the yield at auction of new bonds). We’d think that cash under mattress would be a better trade.

Focus on primary, time to play another record… We suggested yesterday that investors ought to look more closely at the secondary market, because the focus on primary will not reap the desired rewards – for anyone. There just isn’t enough supply. And today, while the market was busy, it was green bonds in financials, covered bonds, SSAs and just BAT the flag carrier for non-financial corporates. BAT issued in sterling in a 40-year maturity at a tighter than initial guidance of Gilts+157bp, following on from Mondelez’s 20-year deal earlier in the week. The Eur600m deal at midswaps+68bp for 6.5 years with a 4x subscribed book at least took the monthly supply for investment grade non-financial issuance to Eur15bn. We’re not sure what that really means, except that it isn’t enough issuance to soak up the sidelined cash. There is liquidity in the secondary market, it is not hard to find and we think one is better off there. The risks of a sell-off between now and year-end are declining and we think spreads are generally going to go tighter, hence there is good upside to using this approach.

And the rest… Oil prices (WTI) flirted with a sub-$40 per barrel level. The UST-Bund spread closed at the record wide of 177bp. US stocks were up 1.6% at the close on relief that the Fed is going to put us all out of our misery and raise rates, with a measured path for further increases thereafter. We’re finally moving on! IG credit edged a tad better (Markit iBoxx IG corporate index at B+152bp) and the HY index was a touch lower too at B+480bp (-1.5bp). Small moves all things being considered, there has to be more to come. In line with the small moves in European equities, iTraxx Main was down at 70bp and X-Over at 294.5bp.

We should open better today on the back of the big rally in US stocks. It’s Thursday, treasure it.

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.