22nd April 2016

Tiptoe through the tulips

FTSE 100
6,381, -29
10,436, +14
S&P 500
2,091, -11
iTraxx Main
68bp, +-2bp
iTraxx X-Over Index
292bp, -8bp
10 Yr Bund
0.24%, +8bp
iBoxx Corp IG
B+143bp, -4bp 
iBoxx Corp HY Index
B+486bp, -11bp
10 Yr US T-Bond
1.86%, +2bp

ECB makes for a feeding frenzy

Buying a bunch of tulips in years gone by for NLG60k was stupid, but at least you got some flowers. And so this period in history will also be much talked about in years to come, probably written about in some form as the “madness of markets”. That is, negative yields on bonds and investors buying them. Zero-coupon debt issued at close to par. And investors piling in. Importantly yesterday though was the ECB meeting, as we looked for some details of the corporate bond purchase programme. It gave us most of what we needed to know.

flagging ECB

Revealed: Corporate bond purchase programme details

The ECB can buy up to 70% of an issue, target maturities out to 30 years and include non-bank and insurance debt. It can buy in primary, and six central banks will manage the programme. Bonds which are ECB repo-eligible can be purchased, and X-Over names will be included. And to be ECB repo-eligible, issue size is not a criterion. The issuing entity needs to be eurozone domiciled/incorporated. All fairly straightforward. Nothing on managing the portfolio and how it might handle downgraded issues which no longer have an IG rating. Nothing either on industry/sector carve-outs – that is, the ECB could finance nuclear projects, the tobacco industry and arms and drinks industries.

The most damning part, though, was that it will effectively subcontract the credit rating work to third parties – that is, the rating agencies. Those very rating agencies that were hammered for not being impartial in the subprime and Lehman crises. The ones who are paid by the borrower to rate the borrower. So now the biggest bank of them all has put its own balance sheet at risk in the most incredible way, jumping into bed with the devil, so to say! We also remain none the wiser on the size of the potential monthly lift, but think that the fear it might aim for more than, say, the €2bn we believe it will struggle to lift will keep the market well-supported and see spreads continue to move tighter. Whatever the ECB buys, it will be holding bonds to maturity.

Otherwise, the ECB left the variables comprising the rate side of its equation unchanged, with little to add apart from remaining accommodative on policy for as long as necessary so as to underpin any euro-area recovery. Draghi carted out the same reasons for the ECB’s stance as previously – Asian/global economic uncertainties, geopolitics and the slow expansion in bank balance sheets all combining to leave inflation and euro-area growth risks to the downside.

Supply on the wane after a super start


€750m deal: Budapest-based MOL Group

With such verve and swagger and generating such excitement, we opened with some €13.5bn of issuance in the first week of April. It’s mysteriously gone downhill since then. We were looking at it as potentially being a record month for non-financial IG corporate bond issuance and even in those early days of April, €48bn was in sight. Well, no more: the following two weeks have given us just €7.5bn and €2.1bn. We’re at €23.1bn for the month to date and with just over a week to go, we do expect the record for April to be broken, as we zip past €26bn over the next week. The YTD total currently stands at €97bn and 2016 is probably set to exceed our reduced year-end forecast of €200bn.

The only deal of note in the market was from Hungarian oil and gas group MOL, which issued a 7-year, €750m deal yielding 2.75%. The transaction was cheap in our view, but being an oil company based in Eastern Europe, one needs to offer a discount to get a deal away. This transaction should trade up. Loxam also added €250m in 7nc3 format, taking the total for the day to €1bn for HY issuance. Loxam’s cost to issue was a very low 3.5%, and for a low double-B rated borrower illustrates how far spreads have compressed.

Corporate bonds stand out from the crowd

The prospect of higher inflation saw to it that Bund yields jumped. The euro’s strength saw to it that equities came under some pressure. Oil prices declined too. The path of least resistance for corporate bond valuations was to go tighter. We can look forward to a period of spreads crunching better in certain sectors, although our view remains that the whole of the credit market will benefit/participate in this trend, born from the manipulative hand of the ECB. The crowding out effect and the search for yield will see to that. For instance, news of the inclusion of insurance debt gave the whole financials sector a boost. Insurance senior paper moved up to 25bp tighter, while insurance perps gained anything up to 1.5 points. The follow-through into banks was clear too, with some CoCos almost a point better in the session.

The iBoxx corporate bond IG index dropped to B+143bp which was 4bp lower in the session (-10bp YTD) with high beta risk leading the way (corporate hybrids and the like). The non-financial corporate hybrid index yield also dropped to 3.85% and the last time we saw that was in September last year. High yield spreads moved 11bp lower on an index basis leaving the Markit iBoxx index at B+486bp and the yield fell to 4.65%. Another indirect beneficiary of the ECB’s intentions. The synthetic indices moved lower with Main at 68bp (-2bp) and X-Over at 292bp (-8bp), rounding off a good day for the credit markets.

Finally, 10-year Bund yields moved higher to 0.24% (a stunning 8bp reversal) while the Italian equivalent yield jumped to 1.46% (+5bp) and Bonos to 1.59% (+6bp). Equities were volatile all session within a small range and closed mixed. The DAX closed up a little, with everything else generally slightly lower on the day. Oil was around 2% down, with Brent left at around $45 per barrel. We don’t expect much in today’s session, perhaps a little defensive given US stocks closed 0.5% lower (S&P).

Have a good weekend, back on Monday.

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.