19th October 2016

Really, there was no vote

MARKET CLOSE:
FTSE 100
7,000, +53
DAX
10,632, +128
S&P 500
2,140, +13
iTraxx Main
72.5bp, +-xbp
iTraxx X-Over Index
331bp, -2bp
10 Yr Bund
0.03%, -2bp
iBoxx Corp IG
B+123.8bp, -0.2bp 
iBoxx Corp HY Index
B+423bp, -2bp
10 Yr US T-Bond
1.75%, -2bp

Brexit was just a dream…

A bit of a bounce back on Tuesday stemmed the tide of negativity around all things sterling, inflation, growth, yields, hitherto risk asset weakness and so on. The markets simply chose to look on the bright side even now thinking there will be no US rate hike next month (following overnight Fed governor comments – and later inflation data, see below).

Small things. But the news flow remained around the UK with the markets excited at a leading government QC’s comments suggesting that MPs would need to ratify any deal under Article 50. We suppose the excitement was that MPs would vote it down (or the House of Commons would in perpetuity) and Brexit will not happen. Into it, even sterling got a bid behind it. What happened to the will of the people? Democracy works in mysterious ways.

That news trumped the rising headline consumer inflation rate which jumped to a near 2-year high of 1% in September. Gilts rallied, stocks rallied, corporate bonds rallied. We’re back to where we have been for most of the past few crisis-fueled years – thinking (for the session anyway) in the context of low yields, rates and easy policy forever. US CPI also slipped in September to 2.2% versus expectations of a 2.3% rise while the core rate of inflation rose by just 0.1% (versus 0.2% expectations). US rate watchers saw that as a sign of a rate hike unlikely coming next month but adding to confusion regards one in December.

Whatever the reasons, the perkier market stance is much welcomed. Nevertheless, we do have an earnings season to contend with over the next few weeks and more immediately, an ECB meeting. The former might offer some blips but the latter ought to have us sail through this meeting with little altercation and with little to concern us.

Gilt yields edged lower to 1.08% (-4bp) while the equivalent Bund yield edged down to 0.03% (-2bp). Stocks gained back a lot of the losses of the previous few sessions with gains of over 1%. On the earnings front, Goldman kept up the bond-trading recovery theme for the big US banks with an excellent Q3 although we had mixed reports – profits warnings and the like – from a host of UK based corporates (blame it on sterling weakness).

Primary opens for non-financials – just

Solitary deal: Snam

The new issue market had a busy session although once again the corporate sector was lighter. We had a deal at least! It came from Italian utility Snam which was back for more, with a €500m deal in 4-year funding (as a measly midswaps+20bp, -15bp inside IPT), having issued €1.25bn (10-year) just over a week ago with proceeds used to repay other debt in a tender offer (increased to €2.75bn). The deal was 3x oversubscribed. It’s the only deal this week in this category, so far.

Real estate investment group Segro European Logistics was the other issuer (financial) also lifting €500m but in 7-year funding at midswaps+125bp with the juicier spread eliciting a book 6x oversubscribed, allowing for pricing to be tightened by 15bp versus initial indications. In sterling, retirement and elderly care specialists, JRP Group, issued a £250m 10-year Tier 2 issue yielding 9%. There was plenty elsewhere from SSAs.

Still bullish corporate risk

So we have the FTSE back up at 7,000, the DAX just 110 points shy of being flat for the year (up 1.2% in the session, or 128 points) and even sterling was closing in on $1.23. Brent and WTI were trading at or above $50.

We are still bullish corporate risk. Valuations have displayed some sturdiness amid volatility elsewhere while market participants have not panicked at all. That has been most evident in the sterling corporate bond market where investors have had every opportunity and much reason to bail. They haven’t. Overall, the corporate bond market has taken a back seat to the trials and tribulations afflicting equities and government bonds and has been a beacon of stability for most of this year – and it is holding up quite well through current headwinds. Boring? Yup.

Secondary corporate credit closed tighter for choice, another excruciating grind better. It’s tedious. But we are holding firm when others assets sell-off and grind better when they don’t. The Markit iBoxx index closed at B+123.8bp (-0.2bp). Sterling corporates moved the same way, slightly better bid and leaving the cash index a little lower on the day. The Gilt rally and the lower index yield saw to it that returns were on the up.

Elsewhere, in a low volume, low turnover session, the HY market could only go better and lopped 2bp off index spreads with the yield down at 3.82% and the lowest level since early September. The iTraxx indices closed better offered (lower) with Main at 72.5bp and X-Over at 331bp.

That’s it. 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.