18th February 2016

One way or t’other

MARKET CLOSE:
FTSE 100
6,030, +168
DAX
9,377, +242
S&P 500
1,926, +31
iTraxx Main
108bp, -6bp
iTraxx X-Over Index
434bp, -21bp
10 Yr Bund
0.27%, +1bp
iBoxx Corp IG
B+188bp, -1.7bp 
iBoxx Corp HY Index
B+650bp, -7bp
10 Yr US T-Bond
1.83%, +6bp

Stock-taking time… It’s not often that we can say that there wasn’t too much going on. Midweek in the middle of February, and time to take a breather. It’s been a whirlwind of an opening seven weeks to 2016, but unfortunately there’s been no romance in it. The markets have got themselves in a bit of a pickle. We’ve fretted about the price of oil, the weakening incoming economic data, poor liquidity everywhere and US rates, while quite strangely, a poor earnings season has seen corporates punished initially (stock price) only for a decent bounce to follow. The tea leaves tell us it is going to be a difficult macro scene for the rest of 2016. The ECB will ease while the Fed will delay. China will slow but will ‘kitchen sink’ it on the policy front to try and prevent a hard landing. US growth isn’t going to save the world, while the eurozone is still all about ‘fits and starts’. A 1-2% move up or down in stocks is now the norm and barely raises much concern and new record low yields in some government bond markets are an expectation, while we ponder as to why corporate bond markets in Europe are feeling as heavy as they are. Real money investors take some comfort with flat returns year-to-date, while benchmarked investors try to scramble for a more defensive positioning bias (lower beta). We all want to chase yield, but the commodity and CoCo debacles have been an annoyance and a frustration. And a reality check. We still believe that there is tremendous strength in the European corporate bond market and we should sometimes, perhaps, look at its being untradeable (poor liquidity) as a positive. Instead, when equities are dropping like stones and there is a rush for safety, the lack of a Street bid (not the Street’s fault) is seen as a sign of an immature market or one which is in precipitous decline, tarnished with the same ills as the stock market. Corporate bonds have always been meant to be buy-and-hold investments, while much of the current illiquidity is down to huge demand and not enough supply (regulatory impact on trading books aside). The huge growth in the market (from €700m in 2007 to €2trn) came about because investors were chasing yield (in 2009) initially and a clipped a quick turn as spreads and yields collapsed. Corporates disintermediated their funding into it. For investors, it is now about preserving capital and generating income.

Just another day at the office… Anglo American was junked by Fitch, but only to BB+/negative (Moody’s was Ba3/negative) while S&P cut Saudia Arabia’s rating to A- and Bahrain’s to BB (both two notches) as the oil/commodity-related fallout continued. Adding to the gloom, Greece was back in deflation territory and RWE suspended its dividend, while Schneider softened the blow of warning on 2016 with an increase to its share buyback programme. On the bright side, US producer price inflation perked up and so did January manufacturing activity. Oil prices fell then were higher, equities were just higher, while the iTraxx indices were were significantly lower and cash credit did very little. Even the highest beta of battered credit, Deutsche’s 6% CoCo, failed to elicit a decent move higher in price given the rally in stocks, stuck at around $80 cash price. Primary drew a blank from non-financials, which was a surprise. As we suggested previously, the demand is there – as witnessed by Apple’s mammoth $12bn offerings and Honeywell’s €4bn issues, and they were all this week. We did get €2.5bn of senior bank issuance (Santander, Nordea and SEB) to add to the €6.5bn printed this week already. The rest was covereds and SSAs.

Better, but still a labored recovery in cash credit… Corporate bond spreads are not racing back like equities might be, but we’re tightening. The Markit iBoxx IG index closed at B+188bp (-1.7bp, still +34bp YTD) with paper marked better across all sectors amid low flows (again). CoCos were again better, reflected in the index yield dropping to 8.1% from 8.55% in the previous session, and off the 9.7% yield high a week ago. In HY, the index was a little tighter at B+650bp (-7bp). The synthetic indices finally crunched better though, with iTraxx Main down at 108bp and X-Over at 434bp, some 6bp and 21bp tighter respectively. The DAX closed up a commendable 2.65% but government bonds didn’t really sell-off with yields barely higher – peripheral yields actually declined. The 10-year US Treasury yield was up at 1.83% and that compares with 1.54% a week ago. Oil prices were up by 5.5% on average and the S&P closed up 1.65%.

It’s all upbeat, happy Thursday. 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.