25th October 2016

Primary revving up

FTSE 100
6,986, -34
10,761, +50
S&P 500
2,151, +10
iTraxx Main
70bp, -0.5bp
iTraxx X-Over Index
316bp, -4bp
10 Yr Bund
0.02%, +2bp
iBoxx Corp IG
B+122bp, -0.5bp 
iBoxx Corp HY Index
B+408bp, +4.25bp
10 Yr US T-Bond
1.76%, +3bp

The issuance numbers are going to look good, but…

Just a single benchmark deal in non-financials, and it begs the question, where have all the borrowers gone? The lowest ever funding rates, good demand made better with the ECB lifting upwards of €1.8bn of IG non-financial debt per week (see below), limited competition from a supply perspective meaning almost complete focus from market participants for any deal at the moment and still, we get barely any supply. The only deal in yesterday’s session in this category was from Italy’s Iren Group, although we know that today, we’re going to get at least €5bn from Danone. No doubt AT&T will be here in due course for some funding. Still there have been too many multi-tranche for our liking making the numbers therefore look good overall for the full-year. It still leaves us unconvinced that the IG non-financial corporate sector is cock-a-hoop at the current favourable funding dynamic, struggling probably with the hoard of cheap cash they already have on balance sheet – and nowhere for it to go.

Otherwise, the news flow was good for Portugal, Germany and the Eurozone as a whole. Portugal was saved from junk by DBRS after we closed for business last week, so Monday’s session saw to it that bond rallied with the 10-year yield on the sovereign’s benchmark down at 3.04% (-12bp) at one stage before rising to 3.12% into the close. German industry bounced back in September to record its fastest expansion in over 2-years according to the latest PMIs (service sector was strong too) and this helped the Eurozone as a whole gather some momentum. With the view from last week being that the ECB keeps policy as is – at worst, then there was no reason for bonds to sell-off (they didn’t) while stocks were flying, in a sense. The DAX, at 10,761, was at its highest closing level this year and in the black – at the close – for only the second time in 2016!

ECB still hoovering it up

After €1.835bn two-weeks ago the ECB increased the pace of purchases to above €2bn again, at €2,089bn last week. It is the fifth time weekly purchases have exceeded €2bn in the 20-weeks since the bond purchase operations began. They have taken €35.9bn of IG non-financial debt out of the market. So, our back of the envelope calculation has the ECB lifting close on €10bn of bonds this month, versus supply of €12.5bn with the Danone deal (and others no doubt) to come. Spreads have moved just 3-4bp tighter on a broad basis (Markit iBoxx index). Something is definitely amiss.

That level of bond acquisition (90% in secondary) should solicit a much more aggressive tightening trend and the resistance to that happening has certainly flummoxed us. Still, we’re not going wider when other risk assets are selling off, and the lack of tightening is probably no bad thing for those looking to maintain still decent entry levels when they buy corporate bonds. Performance has been very good, with returns at around 6% for IG (higher for HY) YTD, while spread have tightened some 30bp offering comfort to benchmark players.

New issue market perks up

We may only have had €500m from Iren in the session to open the account for the IG non-financial market, but the primary market promises much this week. The high yield pipeline is bulging. As well as Iren, we had €2.75bn from Morgan Stanley in a dual tranche senior offering and a Tier 2 from SEB in 12NC7 format for €850m. And there was a plethora of covered bond and SSA issuance in the day. Mandates were announced left, right and centre and there seems to be much to look forward from today onwards.

All that kept credit market participants happy. Not much corporate bond supply – but the promise of it to come and jockeying for position into that huge Danone offering was enough for the day. Elsewhere, we had a small back-up in Bunds, the 10-year yield up at 0.02% while the equivalent Gilt was around unchanged at 1.08%. European equities were generally higher, but closed off the session highs. The S&P closed up 10 points at 2,151.

We had the usual ratings warnings around BAT and AT&T, but in reality they don’t really matter too much. After all, the market is so distorted that these borrowers know that funding costs – whatever the size – will be fantastic, and not only from a historical perspective. And that the old relationship between a rating and spread has been broken. They’re blue chip giants after all.

Secondary corporate credit was again better bid for choice, and the index (Markit iBoxx) was down at B+122bp at the close. The HY market was also better with the index at B+408bp and some 4bp tighter. There wasn’t a whole load of activity (buying) into it, but the broad backdrop of a risk-on market helped the Street tighten-up the market. Sterling spreads edged a touch higher, but the move was so small that it was noise in the big scheme. For the indices, iTraxx Main closed a touch better at 70bp and X-Over at 316bp.

That’s it. 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.