23rd September 2015

VW: From Das Auto to Das Flouto

FTSE 100
5,935, -173
9,571, -378
S&P 500
1,943, -24
iTraxx Main
81bp, +6bp
iTraxx X-Over Index
337bp, +20bp
10 Yr Bund
iBoxx Corp IG
B+155.6bp, +6bp 
iBoxx Corp HY Index
B+501bp, +15bp
10 Yr US T-Bond

Autos, the new banks… The climate lobby might be the only ones happy with the current situation around the Volkswagen emissions scandal. VW’s dabble with emission test results has cast a pall over the whole auto industry. Let’s hope there was no wider collusion and that this is confined largely to VW. At the moment there is some concern that other automakers might be involved, and certainly that is what some believe. An ‘asking questions later’ like trading mentality saw to it that German autos took 5%+ hits in their stock prices today, VW another near 20%! In credit, the auto sector is a core holding, albeit an underweight position for most asset managers given how expensive bonds are (have been) versus other sectors. But contagion has reared its ugly head – and pushed everything lower. The sector (including parts suppliers) represents a significant 9.2% of the iBoxx non-financial index and 5% of the overall index. That’s a meaty amount and, given the recent widening, represents a major hit on performance. For example, the IG auto sub-index spread moved a massive 20bp wider on Monday after the news broke, to B+161bp, and closed some 80bp wider than the tights we saw in early Q1. Today it moved another massive 35bp wider to B+196bp (+115bp off the tights). The auto sector’s returns now come in at -4% YTD against overall IG iBoxx index returns of -1.2%. We would be inclined to stay away for the moment: this could be nastier than BP/Deepwater. The price action has been severe. Admittedly, we are approaching quarter-end and that could have a bearing, but it’s not particularly orderly out there. And it is in non-financials where the hits are being taken, with little discrimination across names. The Street is playing it short too, not bidding for anything longer than, say, a 4-5 year maturity.

Selling into the developing black hole… The price action in Tuesday’s session was weaker than even Monday’s – and for the whole sector, as we suggested it might be. There was much contagion too, as we suggest above. Specifically, VW is a large capital markets borrower, and its cash bonds were 30bp+ weaker again; BMW and Daimler risk was also marked 10-15bp wider, while higher-beta Renault risk was 30-40bp weaker (and it barely sells a car in the US). VW’s 5-year CDS was up at 200bp (+65bp), with BMW and Daimler axed around the 100bp level. Markets have become very, very illiquid – as always in such situations – and some were (panic or no panic) selling auto and other risk into the black hole that seems to be developing. There was little or no short-covering, while few will be looking to bottom-fish here. Furthermore, however one slices and dices it, it is not looking good. VW’s paper occupies some 14% of the hybrid iBoxx index – it is the largest constituent of that index (with Eur7.5bn of hybrid bonds outstanding) – and the bonds were up to 8 points lower today, with smaller sizes going through the trading platforms versus Monday’s session. The VW 3.5% PerpNC15s, for example, were down at a cash price of Eur77 (Eur84 close Monday). Even paper from Robert Bosch, a leading supplier of parts to the auto industry, was under pressure. It’s tempting to believe that smaller-sized flows mean “retail selling’ but it’s more a case of “retail-sized selling” going on, given few in the Street are going to offer a decent bid here, especially on anything with size potentially behind it.

The price action feels like it is a systemic event… There is no systemic impact from this. The 10-year Bund yield closed at 59bp, -10bp! Stocks took a hit again, with the DAX down over 3% – led by those auto players – and now in clear negative territory YTD at 9,571 (9,805 start level). Others did not fare any better, with French autos seeing to it that the CAC was down a similar amount. The FTSE is down around 10% since the beginning of the year, and it seemed to pass us by that the UK’s budget deficit widened and factory orders fell. UK rate hike soon? No. It is a case of finding what else fits the story, and so commodities came back into the limelight – lower – and China was again being cited as a concern. And here, Glencore paper was back at the 2015 wides for example, with the 1.75% March 2025 issue at swaps+340bp (it has been 200bp tighter). At least Tsipras’s re-election in Greece was not being blamed. Back to credit, and the primary market in the non-financial corporate sector was a victim of the malaise, with no issuance in the session and Austria’s OMV pulling its upcoming hybrid deal due to adverse market conditions. The issuance that did come was from financials in CoCo format (HSBC), T2 (insurance) from ASR and some covered bonds.

For the record, the IG corporate bond index closed at B+156bp (+6bp) and the HY index at B+501bp (+15bp). Ouch. In the synthetic space, iTraxx Main S24 was at 81bp (+6bp) and X-Over at 337bp (+20bp). The 10-year Bund yield dropped to 0.59% (-10bp), the 2-year was at 27bp! And no sign of a systemic crisis. 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.