20th September 2016

Ready and waiting

FTSE 100
6,813, +103
10,374, +98
S&P 500
2,139, unchanged
iTraxx Main
69bp, -2.5bp
iTraxx X-Over Index
325bp, -11bp
10 Yr Bund
+0.01%, +1bp
iBoxx Corp IG
B+122bp, +5bp 
iBoxx Corp HY Index
B+441bp, -0.5bp
10 Yr US T-Bond
1.69%, unchanged

Counting down the hours…

Federal Reserve

Decision time looming at the Federal Reserve

The feeling that the US rate markets have hit an inflexion point – will the Fed raise or not – meant that there was little going on, nor is there likely going to be ahead of Wednesday’s decision. That day has gathered an almighty importance for the markets such that government bonds spent the session treading water, equities markets decided to make the most of it and rallied to recover some of the last week’s lost gains.

Credit in secondary was quiet, but thankfully primary gave enough to keep us occupied. As we have stated several times through recent comments, we believe the Fed will see sense and not raise rates (futures suggest this to be the case too). Once we have gone through the communique for any clues that the Fed may give us as to the timing of any subsequent rate hike, we think the markets will settle and rally. We’re looking at low – or lower – for longer in the Eurozone and UK; with policy divergence versus the Fed meaning bond yields here can go lower even if they rise in the US.

The risk-on bias in the session failed to disguise what was a very lacklustre session, with few willing to take on any material positioning at this juncture. So small volumes dictated the moves.

IG: DSM and Celanese US both weighed in with €750m deals.

IG: DSM and Celanese US both weighed in with €750m deals.

Credit was again all about primary with several deals in both financials and non-financials with a couple of HY deals announced for good measure, keeping up the trend for this particular sector which has been having a good time of it of late. In IG, we had deals from DSM (€750m) and Celanese US (€750m) and both were priced 15-20bp inside the initial price guidance.

There’s just no dimming appetite for corporate bond risk. The €1.5bn combined print in the session takes us through the €20bn barrier for September (€20.5bn) and we’re probably looking at a maximum IG non-financial issuance of €35bn by the time the month is out. The HY sector has roadshows/deals on the go for this week, and FIG issuance looks to be picking up, too.

ECB’s record weekly corporate bond purchases

It was excellent when they reported it last week, but yesterday’s publication of €2,657m is a record weekly grab by the central bank (see chart, below). It is the third time the ECB has managed to lift above €2bn, and it takes the 14 week total to €25.6bn (of debt permanently leaving the corporate bond market). The average has popped higher again to a little over €1.8bn.

Once again, the ECB is doing some heavy lifting, and by far exceeding what we had envisaged before the programme started. The average of €1.8bn per week (€7bn+ per month) equates to over €85bn of bonds potentially being extracted – permanently – from the IG non-financial corporate bond market in a year. Gross supply this year will come in at around €270-280bn on our current projections, and we have redemption proceeds as well as new cash coming into the market all fighting for some of the action.

Spreads might have backed up in the past week (around 5bp on IG – Markit iBoxx), but that weakness is not reflective of the ECB’s heavy manipulative hand. We would say it was more the weaker macro tone having an impact on making the Street a little more defensive on its marks.

The IG Markit iBoxx index spread should still tighten to around the B+100bp level in our view (currently around B+120bp). Admittedly, we have had much supply of late, but that should not have been anywhere near the level needed to promote secondary spread weakness. Deals, after all – if we believe the level of demand is real (it isn’t) by the size of over-subscriptions – have had much interest and performance has been decent too. The demand is there (the ECB aside) and we look for some good tightening through to year-end.

Generally, though, we have to say that the corporate sector purchase programme thus far is a success. In so much as the ECB has managed to lift so many bonds, is aggressive as it needs to be and has made its intentions clear.

However, the jury is out on whether they will succeed in lowering funding costs for corporate – and that additional money raised by them is channelled into the macro economy. We remain sceptical on this point, believing that the corporate sector is simply averaging down its funding costs, and that supply levels will not necessarily push materially higher than the average of the past five years (€250-260bn).

That is, the overall deflationary spiral is being added to, and investors are clipping that performance while the going is good to do so in 2016 in the corporate bond market.

The rest in ‘wait and see’ mode

Government bonds closed with little change although Spanish and Italian debt had a better session of it, with 10-year BTP yields down at 1.31% (-3bp) and Bonos at 1.03% (-4.5bp). The equivalent Bund yield was back in positive territory, paying a miserly 0.01% and Gilts closed unchanged at 0.87%. Equities in Europe were on average 1% higher.

In credit, we closed out unchanged in investment grade at B+123bp. It wasn’t very exciting. The same could be said for the HY market (unchanged). There was no need to delve any deeper or broader, it was the same in sterling credit! The only bright spot, for a change, was the better offered (lower) in protection iTraxx synthetic markets, where costs fell. Main was down at 69bp (-2.5bp) and X-Over at 325bp (-11bp) versus the closes on Friday.

That’s it. Back again 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.