1st September 2016

A super September would do nicely

FTSE 100
6,782, -39
10,593, -65
S&P 500
2,170.95, -5
iTraxx Main
68bp, +1bp
iTraxx X-Over Index
311bp, +4bp
10 Yr Bund
-0.07%, +2bp
iBoxx Corp IG
B+119.8bp, -0.5bp 
iBoxx Corp HY Index
B+415bp, -5bp
10 Yr US T-Bond
1.58%, +1bp

Ending on high…

super-septA stellar August concluded with a new issue flourish. Importantly, corporate bond portfolio performance has been excellent too. IG credit returned +0.35% in the month, but has been outdone by a recovering high yield market where returns for August sit up at +1.65%.

For euro-denominated credit those sorts of performances would be good for any month. And there is more to come on the back of an ECB bond buying programme just 10-weeks old, where the central bank’s intentions are clear but yet to have the massive spread and yield impact that we envisage. They’re out to dumb the corporate bond markets down to zero.

Performance for the next several months in that sense will be assured. One should assume that it will, and position for it. That means taking on higher beta risk – or staying with it, and look for flattening trades.

Selected returns for August

The euro markets might be having a good time of it. But the sterling market is having a super time! Gilts returned +2.95% in August, but corporates in this currency have returned +3.2%. It is therefore of little surprise that inflows into bond funds have picked up. Looking at those numbers, as well as the year to date returns, both the trained and untrained eye would be envious and want some of the action.

The Markit iBoxx IG corporate bond index broke through the B+120bp barrier for the first time this year to achieve a new low for 2016 of B+119.8bp, and the day’s efforts represented another 0.5bp grind better in the session. It also highlights the lack of activity occurring outside the ECB’s daily efforts, with investors content to chance their hand in the new issue market in order to lift bonds which might represent better value. That’s not always the case, but if issues break tighter, there’s a sense of contentment. Having said that, corporate hybrids had a decent session of it, and prices moved a 0.25-0.5c higher.

The HY markets also continue to crank better, with another good session, and spreads considerably tighter. The Markit iBoxx index dropped to B+415bp which is also the lowest this index has been in 2016 (and a yield one, at 3.69%). In all, the corporate bond market continues to have a good time of it.

Issuance satiating the needs of the many

August ended with a flourish with another €3.25bn in yesterday’s final session, taking the monthly total to €12.6bn, and the total for 2016 at €184bn. We are on track for €270bn for the full-term, although we would not be surprised if we hit the record €290bn seen in that panic-stricken crisis issuance-fest in 2009.


Deals of the day: Professional services company Bureau Veritas pitched in with two tranches

The deals yesterday came from Bureau Veritas, Cofiroute, Delph and GM. All were priced inside the initial price talk – as we have come to expect, by the usual 10-25bp.

We had 2-tranches from Bureau Veritas for a total of €700m, two from Cofiroute split evenly for €1.3bn and single tranches from Delph Automotive (€500m) and GM (€750m). It was worth noting that Iceland’s Íslandsbanki sold €500m in 4-year paper and Nordea printed a billion in 10NC5 T2 format.

Uncertainty reigns in Spain

A big “oops” in Spain as incumbent Prime Minister Rajoy lost a confidence vote in parliament last night. Bonos yields were steadily creeping higher through yesterday’s session on the prospect of this eventuality. Seems like they will be higher again when we open for business today on the back of more elections in a couple of months time should a new government not be formed. Bonos had enjoyed a good bid through August, the 10-year seeing a record low yield of 0.91% but is now yielding 1.01%, having given back 6bp yesterday.

Overall, August has been kind to the markets. We’ve got through it with little altercation and post-Brexit blues (if there were any) seem to be fading. With that no longer an overhang, we’re into September and while today and Friday might be a bit of a damp squib ahead of the payrolls report, we have much to look forward to in September. In credit especially.

Investors are sitting on some excellent performance, the supply pipeline promises much, the ECB is keeping it all together and any weakness on macro is seen as a positive for an economy blowing at just the right temperature. We’re seeing out any daily fluctuations in stocks, the oil price is dancing to the tune of US inventories and any OPEC politics and government bond yields are anchored (or going lower ultimately) in our view.

What’s not there to like about corporate bonds?

Have a good day. Back tomorrow.

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.