27th September 2016

Surely, they’re too big to fail

FTSE 100
6,818, -91
10,394, -233
S&P 500
2,146, -19
iTraxx Main
73bp, +2bp
iTraxx X-Over Index
333bp, +8bp
10 Yr Bund
-0.12%, -3.5bp
iBoxx Corp IG
B+125bp, +1.5bp 
iBoxx Corp HY Index
B+441bp, +6bp
10 Yr US T-Bond
1.59%, -3bp

Whiff of crisis in the air…

Well, that is what the markets would have had us believe after some fairly significant falls in bank stocks and equity markets – allied with a better bid for government bonds. A report in Germany suggesting that there would be no bailout for Deutsche Bank should events materialise meaning that Germany’s number one bank would need taxpayer support to survive set the cat amongst the pigeons. Don’t believe it.

If need ever arose, a refusal to bail-out Deutsche would unleash an almighty contagion impact that we would get that systemic financial crisis we’re fretting about, and which would plunge us into our darkest period yet. All asset classes would get hammered save for Bunds, Treasuries, Gilts and perhaps other G7 government bonds. The rest is unthinkable. That is, Deutsche Bank is too big to fail. We understand the market’s reaction to the news – after all, we don’t like uncertainty – but the weakness should be seen as an opportunity. Given the dire situation the global economy is in, this could become the financial systems worst ever crisis.

Having hoped for some stability and strength in risk markets following the lack of action last week from the Fed, that report on Deutsche Bank scuppered that. We went up to 2% lower in stocks and the credit synthetic indices edged wider on the follow. Deutsche’s stock was over 7% lower into the close while it’s 6% AT1 deal was over 2-points down at around €73. Government bonds were better bid and the German 10-year Bund yield was down at -0.12% (-3bp). Even the periphery (government bonds) was essentially better bid eventually, suggesting some scepticism of a global crisis potentially emerging from something around Deutsche Bank’s potential woes.

Still, litigation, fines and previous misconduct is something the global banks and some corporates aka Volkswagen – (and investors) are going to have to live with. It’s about big government filling depleted coffers as it goes after big business which may have done wrong.

Primary sees rare pulling of a deal…

Flight cancellation: Deutsche Lufthansa

Flight cancellation: Deutsche Lufthansa pulled a €500m deal

We don’t think anything to do with Deutsche Bank – nor with Germany Inc., but we were surprised by the Deutsche Lufthansa decision to cancel its expected 7-year, €500m deal late into the afternoon. The X-Over credit’s deal was perhaps a little rich – but an inability to tighten final pricing versus IPT (like most other deals have been) might have hit a few egos within the institution. Or they were just badly informed by syndicates mis-reading the market mood. A few might point out that it is a rare phenomenon for a deal to be pulled, and that the market – from a pricing perspective – might have got ahead of itself (we think it has, see yesterday’s note) but we are still surprised that such a well-known borrower saw fit to postpone.

Still, we had some primary, but not the opening of the sluice gates we might have anticipated. The risk-off tone probably dissuaded some syndicates to go with it. The small cluster of deals which did come saw a HY market tap from Norwegian Air Shuttle (for a reduced €60m), EnBW lifting $300m in a 60NC5 hybrid deal while Virgin Media was looking for £350m in an 8NC3 structure.

ECB corporate bond heavy lifting continues

They’re coming after your bonds. That message has been loud and clear for a while. The ECB reported that it’s coffers had swelled to €27.9bn of corporate debt, having lifted another impressive load of bonds to the value of €2.3bn in the last reported week. It is the fourth time in 15 weeks that the ECB has acquired more than €2bn of corporate debt (see chart below).

ECB means business, average increasing

That’s an increased average of €1.86bn per week since operations began, or a mighty €2.45bn per week if we look at just the last three. The ECB has upped it’s game of late and it means business. The impact of their buying power doesn’t seem to have been felt too much in the sense that IG spreads have been weaker in the past week, not by way of a crowding-out impact being seen on a positive push into HY. The latter will be more of a slow burning fuse while the former should be felt sooner rather than later.

Closing around the lows

European equities closed at around the session lows, with the DAX being the worst performer over 2% lower. Having been close to being in the black for only the second session this year, the index is now 350 points away from being so. The Bund yield dropped to -0.12% (-3.5bp) as safe haven debt was sought, the equivalent Gilt yield was down at 0.70% (-3bp). BTPs gained to yield 1.18% (-3bp) and Bonos were again closing in historic lows at 0.91% (-5bp, record low 0.90%).

And in this risk-off day, IG spreads as measured by the Markit iBoxx index, were a basis point or so wider at B+125bp, although the index yield fell to 0.85% on the back of the rally in the underlying. The CoCo bond market particularly feeling the pressure. The drop in equities saw to it that HY markets were also in defensive mode with spreads here a little wider. The iTraxx indices pushed higher as the cost to insure risk rose, with Main at 73bp and X-Over at 333bp.

Be careful out there. 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.