7th October 2016

UK on the rack

MARKET CLOSE:
FTSE 100
7,000, -33
DAX
10,569, -17
S&P 500
2,161, +1
iTraxx Main
73.75bp, +0.25bp
iTraxx X-Over Index
333bp, +1bp
10 Yr Bund
-0.02%, -1bp
iBoxx Corp IG
B+124.9bp, -0.4bp 
iBoxx Corp HY Index
B+433bp, -2bp
10 Yr US T-Bond
1.74%, +3bp

UK plc under pressure – Oops…

tide-out

Knee-jerk? All seemed fine before sentiment shifted

The tide has gone out for the moment on the markets mini-fixation with reports that some inside the ECB believe tapering is coming once the current QE programme runs its course, come March 2017. The latest minutes suggest that there is support for Draghi to extend the programme.

Still, it is incredible that mood and sentiment shifted on the flick of a switch away from the majority in the market thinking of the programme being extended and enlarged! Surely all those who had thought the latter had some conviction that enlargement/extension was needed on the back of the still depressed state of the Eurozone economy.

We believe the tapering as a means of QE-exit isn’t going to occur soon and that the Bund yield in the benchmark 10-year maturity will visit -0.20% before +0.20%.

Anyway, we endured a calmer session ahead of today’s non-farm payrolls. Even Deutsche Bank’s stock saw a slightly better bid. Not a stock we would be bottom fishing, admittedly. Oil aside, markets were little changed and we saw very little movement around government bond prices. Except Gilts. And sterling. Sterling continued to come under considerable pressure, taking another tumble to trade off a low $1.26 handle, while Gilt yields moved sharply higher – the 10-year at 0.89% (+8bp).

Hard Brexit fears has spooked a few, it would seem. The BoE announced that it had bought £507m of corporate debt, just £9.5bn to go. Spreads didn’t react, closing a basis point wider on an index basis. Oil is on a roll, with the price per barrel at over $50 for WTI and holding above $52 per barrel for Brent.

More utility issuance in primary

edf

A dual tranche green bond for EDF Energy

In credit, primary opened up a little and we had a couple of utilities to the fore – but they being only the second and third non-financial IG corporates to print this week (the other being Terna – a utility).

First up was EdF with a dual tranche green bond (for €2.5bn in 10-and 20-year maturities), followed by Italian utility Hera which was in for €400m. All three issues were repriced 10-15bp inside initial price guidance – as is now usual. No one expects anything different, and these pricing games don’t even meet with much disdain anymore.

With nothing likely in today’s session, just €3.65bn has been issued in what is a low level of issuance in the corporate sector as we close the first week of the final quarter. With investor cash positions needed to be whittled down before year-end, some might be tempted to add more than they might like through secondary (if primary doesn’t pick up).

With the ECB on the offensive too (with its corporate QE), maybe we have the push so sorely missed of late, to help spreads gain some traction and tighten through these final months of 2016.

Payrolls make for dull end to week

We’re blaming payrolls for a fairly dull end to the week, but it has been an eventful one for some markets around the taper tantrum on Wednesday, what with Deutsche’s ongoing concerns and the potential for a hard-Brexit following comments from May at the Tory party conference.

Bond yields generally have backed-up, having dropped sharply at the back of last week and are enduring their own rollercoaster ride – with none of it coming from the prospect of economic recovery leading an unwind in current official monetary policy (higher rates, that is). UK stocks have had a good time of it but are largely higher on a weaker currency.

As for credit, a rare treat with spreads looking like they will end the week tighter – unless something untoward greets us in today’s final session. The ECB reported earlier this week over €1.8bn of purchases in the last period and with supply failing to inspire, we have managed to grind out some spread performance. For once, the supply/demand in balance is working in favour of that grind better.

In yesterday’s session, we closed out marginally better in IG but after yet another day where flows and volumes were light. The Markit iBoxx index closed at B+124.9bp (-0.4bp) but that’s around 3bp tighter this week, before today. In HY, we edged tighter for choice which left the iBoxx index at B+433bp (-2bp). And with it, the iTraxx indices closed around unchanged at 73.75bp and 333bp for Main and X-Over, respectively.

That’s all this week. Have a good weekend, back with you 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.