1st November 2016

All Fed… up

FTSE 100
6,956, -7
10,665, -31
S&P 500
2,126, unchanged
iTraxx Main
73bp, unchanged
iTraxx X-Over Index
330bp, unchanged
10 Yr Bund
0.16%, unchanged
iBoxx Corp IG
B+121bp, unchanged 
iBoxx Corp HY Index
B+409bp, +2bp
10 Yr US T-Bond
1.83%, -2bp

Halloween – and an end of month lull…

We closed out the month amid an array of economic data that was mixed, but pointing to a steady macro outlook where inflation picked up (core flat) while GDP growth was stuck at 0.3%, all in the Eurozone. In the event, it was another session not too dissimilar to two or three we had before it – stocks and government bonds doing very little. But this time the primary corporate and other bond markets were also caught napping. That means the markets were very quiet in this final session. We suppose that was only to be expected given that October was bit of a hair-raising month and especially fearful for many investors given that back-up in rate markets. The Fed is up this week, but will only shock if they move on rates (December it will be), while non-farms on Friday might see both events contrive to leave us with a lighter week activity-wise.

Anyway, it’s not been too devastating for all. Equities have generally held up well, corporate bond spreads have been resolute in the face of hostility for government bonds where yields have backed up quite considerably and, as a result, eaten into returns for corporate bond market players. 6% for the year into the end of September is now 5% total return for the YTD as we kick-off November. Had we suggested 5% at the beginning of the year, most would have taken that – and probably still would. We had looked at 3-4% as being a good result.

Spreads have tightened only 33bp on an index (Markit iBoxx) basis and that should be some source of disappointment given that the ECB has entered the fray and done some serious lifting – but not managing to drive spreads materially tighter. Here, we would have been looking at somewhere around the B+100bp level instead of the B+121bp we currently reside at (started 2016 at B+154bp).

Cheers to Enterprise Inns for the only deal of the day

Cheers: Enterprise Inns did the only Halloween HY deal

Primary markets eventually had a good month, rescued albeit in the final week of October which saw IG non-financial issuance come in at €26bn for the month – and just over €240bn for the 10 months of the year. In HY, we had €4.4bn of issuance with almost €2bn of that coming in the final week of October, while senior financial issuance was in at €11.5bn. The sole deal in yesterday’s session came from Enterprise Inns which issued a HY deal for £250m.

ECB has another good week

After €2.1bn two weeks ago, the ECB’s pace of purchases remains impressive but did drop a little to €1.92bn last week (see chart below). The average is rising to around €1.9bn per week. They have taken €37.2bn of IG non-financial debt out of the market. That’s €8.4bn in the last four weeks alone versus supply of €26bn.  Spreads have moved just 3-4bp tighter on a broad basis (Markit iBoxx index). Something remains definitely amiss.

ECB bond buying since week 6

In the €8.4bn the ECB has lifted in the last four weeks, 90% has come from the secondary market, but there has got to be (we would think) a more aggressive tightening trend unless investors are “happy” to sell into the ECB’s bid, and then hoard their cash and rotate into primary. We would think that investor cash levels are a little higher than normal because primary will not be satiating their needs. At worst, spreads are not likely to gap wider, and returns will be assured assuming the underlying (government bonds) do not sell off in any major way from these levels.

Nothing happening on the last day

The session petered out into bit of a bore draw. Government bond yields did very little, the 10-year Bund unchanged to yield 0.16% with the equivalent Gilt a touch lower at 1.24%. Italian yields moved higher a touch – now at 1.66%, while Spanish government bond yields were the winners on news over the weekend that a new government would be sworn in (Rajoy again) and yields on the 10-year Bono fell to 1.20% (-3bp).

Maybe the government debt markets are not dead and buried yet and the sign of low inflation and growth might just see us have yields head lower righting the tantrum the market had last week. That December ECB meeting might just turn the tide (extension of the current stimulus).

Equities closed up to 0.75% lower (CAC index), while the DAX did very little – off just 31 points and still in the red YTD. Oil had a wobbly with little news around on how production cuts – or an agreement – might be reached. that left Brent lower at $48 per barrel and 3% down in the session.

As for the corporate bond market, secondary was light as we might expect for a Monday – and especially so for one which also happens to be the last day of the month! The Markit iBoxx index for IG closed at B+121bp – and unchanged. The high yield market was perhaps a tad better offered for choice, with cash spreads just wider and the index at B+409bp (+2bp). Noise. And lest we say, the sterling corporate bond market closed unchanged. The iTraxx indices also closed unchanged with Main at 73bp and X-Over at 330bp.

That’s it. Happy November. 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.