27th October 2015

Step away from the thundering herd

MARKET CLOSE:
FTSE 100
6,417, -27
DAX
10,801, +7
S&P 500
2,071, -4
iTraxx Main
70.5bp, +0.5
iTraxx X-Over Index
296bp, +3bp
10 Yr Bund
0.5%
iBoxx Corp IG
B+155bp, -2bp 
iBoxx Corp HY Index
B+491bp, -7bp
10 Yr US T-Bond
2.05%

It’s the wrong way round… The headlines should dictate the direction we go; instead we got a day of inactivity leading contrived headlines. Can it really be the case that over the weekend all and sundry decided that further monetary stimulus at some stage over the next few months isn’t coming? What suddenly happened to create such a view? We think it was simply a Monday in October and that it was the beginning of half-term across much of Europe that led to such a drab session! Time for a break for many market participants, that is. Equities were +/-0.5% for much of the session, ending mostly in the red; government bond yields moved a basis point or two (mostly lower); and cash credit was actually stable to better bid amid poor volumes and little activity. While we have been quite clearly bullish for the latter, it does seem that unless the herd is in full rampage, few are going to want to add. Primary was effectively closed and as much as we hope it picks up quickly, the FOMC is going to make sure that this week is effectively a no-no for issuance (just one deal today). The window looks closed until after the FOMC on Wednesday.

Corporate bond markets will shine again… The conditions for corporate bonds remain very favourable. That is, the ailing global economy doesn’t seem to be exhibiting much possibility of cliff-risk (sudden collapse); easier monetary policy is coming and is here to stay; government yields will keep edging lower in anticipation of it and the default rate and rating transmission risks will stay supportive. Higher beta risk still works; lower-rated/quality debt and adding a bit of duration risk will also offer upside. Supply might come back to check any tightening trend, but it won’t blow our market out of the water. We’ve started to recover well post-VW, have taken on Glencore’s woes and absorbed BHP’s hybrid as well as Generali’s subordinated debt offering. As we have said previously, add risk when you can, not when everyone else does. If pockets of liquidity emerge in these quieter climes – and they will – then it is time to act.

Nothing much in the headlines, so markets just taking a breather… The headlines took in a German Ifo index which was down versus the previous month but still better than expected. Toyota trumped the troubled VW for bragging rights as to the biggest motor company in the world by sales. Tuesday is a big earnings day and we have a few European companies that matter with third-quarter earnings. BASF, BP and KPN come to mind while in the US, Apple, Bristol-Myers and Merck & Co will be closely watched.

Lower stocks but credit holds firm… We seem to have an eye on the stock markets more and more these days. Bereft of any decent supply to focus on, participants are shifting their focus to the stock markets for clues as to how to trade the corporate bond market. That said, while stocks edged down a little, we managed to hold steady in spread markets on Monday, with cash low beta a basis point or so better and higher beta risk 2-3bp tighter. Corporate hybrids were firmer, perhaps 0.75 points at best. The iBoxx IG corporate bond index closed at B+155.5bp (-2bp) and the HY index crunched lower to B+491bp. We have a month-end target of 475bp. The iTraxx indices closed with S24 Main at just under 71bp and X-Over at 296bp, both a little higher versus the closes of last week.

Today’s sole new issue in the non-financial sector came from Italian utility Iren. The borrower benefited from no competition in the market for its Eur500m, 7-year issue (rated mid triple-B/Fitch) managing to bag a 7x subscribed book and 18bp tighter pricing (at midswaps+232bp) versus the initial price talk.

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.