6th October 2015

More of the same please, sir

MARKET CLOSE:
FTSE 100
6,299, +169
DAX
9,815, +262
S&P 500
1,987, +36
iTraxx Main
87bp, -4.5bp
iTraxx X-Over Index
350bp, -23bp
10 Yr Bund
0.56%
iBoxx Corp IG
B+168.7bp, -1.8bp 
iBoxx Corp HY Index
B+537bp, -10bp
10 Yr US T-Bond
2.05%

In need of inspiration… And it seems like the market is of a similar view. Bunds retreated with little drama, the periphery tightened a little and iTraxx was better offered (lower) into a generic risk-on day after Friday’s weakness. Volumes were slow, though it feels like we are just treading water until something blows (for good or for bad). We can make it more dramatic in the sense that we saw out a good session for everything except VW paper (especially its hybrids), and that firmness may have been helped in a small way by the boost from Spain’s upgrade at the end of last week (periphery bid better). For instance, LT2 paper especially was also better bid, and even EM credit managed a decent day. Single-name event risk finally has limited contagion effects – until the next event; the market is believing increasingly that the Fed will not raise rates; Glencore in asset disposal mode or ‘for sale’ was roundly cheered; and the weak service eurozone/UK PMIs were seen as a sign that the ECB would be pushed closer to extending its QE programme. The US ISM similarly disappointed. It’s been a while, but the glass was seen as being half full, with bad news good for some risk assets. For corporate bonds, there was no grab-fest but sentiment was better, helped in no small part by the 2.5-4% rise in equities. In a sense, we are still digesting the payrolls report, but it is akin to being in that hole (football parlance) before the next Fed meeting and the earnings season which kicks off on Thursday. So after several fairly heavy weeks, the credit markets were making hay of any recovery from what we can only call distressed valuations.

Headlines keep VW down… The headlines around VW made sure its bonds continued to underperform, while Glencore was better into a rollercoaster of an intra-day equity ride. Talk from the top of VW of existential crisis, however small, is unhelpful because the markets are playing to the headlines in these rather dramatic climes for the company. Its stock did manage to end in the green, pulled higher by the overall stellar rise in the DAX, but it languished in the red for much of the session. Elsewhere, the iBoxx index managed to recover some lost ground, closing at B+168.6bp (-1.8b) with higher beta sectors leading the charge better (CoCos, hybrids and so on). The HY index managed a 10bp tightening to B+537bp. In iTraxx, Main tightened to 87bp (-4.5bp) and X-Over a whopping 25bp to 350bp from Friday’s closes.

Sole ‘corporate’ takes sub-benchmark sized funding… We had a new issue as Wendel printed a no-grow Eur300m, 4.5-year deal priced to yield a touch under 2%. Rated BBB-, the borrower isn’t the easiest of names to market, but the cheapness of the sub-benchmark sized offering no doubt enticed investors. We would not be surprised if Tuesday opens better, that syndicates get other borrowers to chance their arm and use the opportunity to get quick-fire deals away. Any calm will be seen as an opportunity for deals: there is a backlog of them to get done, after all. And finally, we had the rather curious case of the Province of Ontario pulling its 10-year euro deal. British Columbia printed a 10-year last week for Eur500m and it would have been no shame for Ontario to have taken less than the Eur1bn they might have wanted. An SSA borrower, offering some pick-up to secondaries, but it could not gain enough support. While not ECB-eligible collateral, it would still have been a place to park some liquidity and receive some yield.

The strong close in US equities (+1.8%) ought to feed through into a better open in Europe and we would think some more primary activity should that be the case. 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.