10th December 2015

And now, the end is near…

MARKET CLOSE:
FTSE 100
6,127, -9
DAX
10,593, -81
S&P 500
2,048, -16
iTraxx Main
75bp, +2bp
iTraxx X-Over Index
312bp, +10bp
10 Yr Bund
0.60%
iBoxx Corp IG
B+150bp, +1bp 
iBoxx Corp HY Index
B+488bp, +8bp
10 Yr US T-Bond
2.21%

Haemorrhaging stops, for now… After a few difficult sessions, we are into respite territory where we fail to move decisively anywhere. Thank goodness. Because the rout in some areas on Monday and Tuesday – in fairly thin markets, we believe – was beginning to look ominous. Still, there doesn’t seem to be much confidence out there to try and finish the year with some kind of rally, no mini-flourish to help all and sundry gain back some performance. We saw that in Wednesday’s session as jitters resurfaced on little meaningful newsflow. Meanwhile, investors in the corporate bond market were happy to take down a decent amount of supply in Wednesday’s session, while looking forward to thinking about positioning, inflows, the potential for outflows and performance for 2016. The kick in the teeth in 2015 was from idiosyncratic situations, and here we mean Volkswagen; the disruption of the commodity cycle (hitting Glencore and Anglo in particular); Chinese growth worries and the broader implications of it; Brazil and other EM markets; and monetary policy (Fed/ECB) pushing yields higher. That’s a lot to contend with, but these situations have got lost in some sense in a two trillion plus-sized market with close on 2,000 issues. We have not being hit too much by way of outflows, the default rate remains extraordinarily low given where we might be in the cycle (and we ‘cycle’ in the loosest of terms), while the big ‘sector’ theme was/is around commodities. European corporate bond markets have actually fared quite well and bond spreads have been dragged wider by events in other markets, while secondary market illiquidity has evaporated and left a disproportionate widening in spreads. There have not, at any stage, been enough selling cares to justify any of the periods of extreme weakness. Investors have learned that selling paper into weakness with the hope of buying it back later at weaker levels doesn’t pay. Those days are long gone.

Eur4bn day in primary likely to be the last big one… Spain’s Repsol issued Eur600m in 5-year funding at midswaps+190bp to kick off the day’s proceedings (books barely reached a billion) and then we had a sub-benchmark Eur300m from Legrand at midswaps+85bp in a 12-year maturity. The big deal came from a triple-tranched effort from German real estate group Vonovia as it took Eur3bn in acquisition funding. The 2-year floater, 5-year and 8-year fixed deals were priced at Euribor+95bp, midswaps+140bp and midswaps+170bp respectively, with all tranches eventually priced 10-15bp tighter than the initial price talks. Daimler offered sterling investors £250m in a 6-year deal.

Markets slump into the close… A weak start, better through the middle of the day and a slump into the close. We think on the back of the weak US inventories data for October suggesting a lower GDP print for Q4. But later, oil fell – because it can – and the uplift earlier in the session on the Dow Chemical/DuPont merger announcement was all but forgotten. The S&P closed 0.8% lower. So, the Dax ended 0.75% lower and the CAC almost 1%, but the Footsie did well as commodity stocks rebounded in a very volatile session. Brent and WTI lost 1%, lurching lower into and after the European close. Brent was at early February 2009 levels and below $40. It does seem like the market wants to push prices lower, so lower they will quite likely go, especially as the US oil stockpile actually declined. Government bond yields rose a little, with the 10-year Bund yield up at 0.60%, although the 2-year was better bid, closing at 0.33%. 10-year BTPs were up at 1.57% (+2bp) and the Bono at 1.62% (+2.5bp). There was moderate weakness in corporate credit with spreads a little weaker for choice, which left the Markit iBoxx IG corporate bond index stroking B+150bp again (+1bp). The high yield index was 8bp higher though, at B+488bp. And finally, iTraxx Main and X-Over were 2bp and 10bp higher at 75bp and 310bp, respectively.

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.