6th November 2015

UST-Bund 10 year spread… heading for 200bp

MARKET CLOSE:
FTSE 100
6,365, -48
DAX
10,888, +43
S&P 500
2,100, -2
iTraxx Main
71bp, unch
iTraxx X-Over Index
291bp, unch
10 Yr Bund
0.61%
iBoxx Corp IG
B+151.5bp, -0.3bp 
iBoxx Corp HY Index
B+468.4bp, -0.5bp
10 Yr US T-Bond
2.25%

UST/Bund spread or new issuance levels – where to?… Let’s look at both. The spread between the 10-year Treasury and the 10-year Bund is around 162bp and just a shade off its 166bp all-time high. Yellen’s bullish tone on Wednesday suggests that a December rate hike is almost certainly coming, and the US yield curve will adjust accordingly. It will probably bull-flatten, but the back end will rise some too. On the other hand, today’s fall in German factory orders for September illustrates that the eurozone economy remains mired in ‘recession’, and the mixed data from the eurozone totally justifies the ECB’s stance that further easing is more likely than not. The BoE’s dovish tone on Thursday attested to difficulties in Europe – and indeed the global economy. That additional ECB easing might not come in December given Draghi’s more cautious tone earlier this week, but most observers are of the view that further QE is coming. That means current yields in the eurozone ought to be anchored: the front end is, but we look for some movement lower in the back end. We might not get down to the low teens for the 10-year Bund yield like we did in Q1, but we don’t need that to position for a 200bp UST-Bund spread over the next quarter or two. It is quite possible that is where we are heading. We will discuss our view on the implications for corporate credit from these differing rate cycles in Monday’s daily.

Supply threatens to underwhelm… As for issuance, the month so far has delivered Eur3bn and the YTD level of non-financial IG corporate issuance is at Eur236bn (Eur259bn in 2014), according to data supplied by Dealogic. November can be a very heavy month. For instance, in 2014 non-financial supply hit a fantastic Eur41bn (Dealogic data), but 2011 0nly offered us Eur9bn. We have suggested that Eur20bn or a little more is quite possible. Unfortunately, the current macro uncertainties, jitters around higher rates and the subsequent market volatility are acting as disruptive forces in terms of allowing sustained investor (and issuer) confidence to persist. For better consistency in issuance over a longer period, the tea leaves need to be perfectly aligned. As for the HY market, that will only reopen properly once investors and issuers have become comfortable with the IG one. The HY market has printed just Eur2.7bn of deals, from 10 issues, since the beginning of August, and the YTD total is Eur46.5bn (source: Dealogic). Eur50bn by year-end is going to be tough ask at this rate, especially compared to the Eur57bn record issuance in 2014. On Thursday, RCI Banque was the sole corporate deal, with a Eur500m no grow at midswaps+113bp on a book 6x covered.

Equities soothed by the dovish undertones… Looser policy for longer means risk assets stay afloat. That helped keep most European equity indices in the black. Those followers of the trend, namely the iTraxx indices, managed to move very little in tandem with stocks, while cash corporate credit remained steady to perhaps very slightly weaker. Perhaps that is just a healthy reaction after much tightening. We will need more than what we have at the moment to derail the overall strength in the cash market. After all, year-end beckons and money needs to be invested. Elsewhere, UK car sales fell in October for the first time in over 3 years, while reports showed that the emissions scandal was beginning to have an impact on VW sales in the big European markets. US earnings were mostly misses today and there was some pressure on the S&P/Dow as a result, but this failed failed to elicit much of a follow-through into European closes. VW paper was mostly unchanged to perhaps 2-3bp wider in senior (after 30-40bp of weakness on Wednesday) while the new RCI deal was a basis point tighter versus reoffer at the close. The new Barclays T2 from Wednesday was 7-8bp tighter,

The Markit iBoxx IG corporate bond index closed pretty much unchanged at B+151.3bp and the HY index also unchanged at B+468bp. iTraxx Series 24 Main was at 71bp and X-Over at 291bp.

Happy Friday and have a good weekend. Back 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.