17th February 2016

Don’t back up the truck just yet

FTSE 100
5,862, +38
9,135, -72
S&P 500
1,896, +31
iTraxx Main
114bp, -1bp
iTraxx X-Over Index
455bp, +5bp
10 Yr Bund
0.26%, +3bp
iBoxx Corp IG
B+187.5bp, -2bp 
iBoxx Corp HY Index
B+657bp, -5bp
10 Yr US T-Bond
1.78%, +3bp

Feed the fish when they are biting… It is so tempting to think about backing up the truck. After all, entry levels are so much better than they were. Credit spreads have widened 25% in both IG and HY, and there is paper around in secondary with willing sellers into a sensible bid. And while stocks were down today, they have bounced back (generally), while oil has been on the rise and seemingly found a floor at $30+ per barrel. Inflation forwards might start to look better into this, while we are all fairly sure that additional ECB stimulus is coming. We can almost totally dismiss the weak German ZEW business sentiment reading taken at the peak of the recent weakness – of course, in the eye of the storm, sentiment would have soured. With all that though, we don’t see much willingness from investors to pile in, save for a few believing that bank subordinated paper – especially CoCos – have been way oversold. The probably have, but unfortunately the next headline isn’t far away. We are however very surprised that the primary market for new non-financial corporate deals delivered nothing. After Monday’s Honeywell grabfest, we would have expected issuers to have taken note and chanced their arm. The demand for primary corporate risk is very strong; there’s comfort that new issue premiums will generate some performance and deals will get away. Spreads in cash have stabilised for the moment, and we are resigned in our belief that they will not ratchet better any time soon. They are likely to tighten only very modestly on a good day, while they will quite possibly gap wider on a down day. So now is not the time for borrowers to penny-pinch if there is a pressing funding need (or otherwise). We believe the pipeline is decent, although visibility is mainly around the US borrowers which have been roadshowing their wares (Amgen and LyondellBasell, with ASML also due).

Oil producers snatch defeat from jaws of victory… A potential freezing of output at current levels by four of the big oil-producing nations was initially greeted with much enthusiasm, with prices rising by 5-6%. However, on closer inspection the markets decided the deal might be too good to be true, and down we went! As well as other nations also needing to agree, demand declining and the US shale gang looking on with potential opportunity to up the rig count, that early brightness was dimmed. Other news took in more weakness in US manufacturing, this time from the NY Empire survey, oil-dependent Norway’s GDP fell by 1.2% in Q4 and UK inflation rose a little in January. Oil ended the day a  lower (1.5-3% between WTI and Brent) and European equities were mixed between +/-0.5% for much of the session, but gave way to weakness into the close (DAX -0.75%). Government bond yields didn’t move much, a little higher with the 10-year Bund at 0.26% (+3bp), the equivalent BTP at 1.63% (+2bp) and the Bono at 1.74% (+5bp). Portuguese 10-year sovereign yields were just a basis point higher at 3.50%.

Credit’s so-so day… Not in terms of credit quality, given the 3-notch hammering dished out to Anglo American on Monday by Moody’s (to Ba3/negative). But a tentative bid has re-emerged, although flows and volumes remain light. And higher beta paper was the outperformer, despite a more mixed stock market. The Honeywell deal came with a 10bp premium and tightened by pretty much that amount. Elsewhere, CoCos notably continued to edge higher amid the lightest of flows, but such is the level of secondary market illiquidity that the price action is quite disproportionate. Anglo paper was down and out at one stage but managed a decent recovery to close around a point lower, probably helped by news of its previous restructuring plan adding another $3-4bn of asset disposals. Having seen $69 at the beginning of last week, Deutsche’s 6% AT1 was up at $80, while the bank’s CDS was down at 220bp (recent high of 280bp) – so a decent recovery into the generally improved sentiment in the markets. In primary, we had several rather unspectacular senior financial deals (Santander, BNP and SG) to contend with. Overall, the Markit iBoxx IG index was 2bp tighter at B+187.5bp, CoCo index yields fell another 50bp and the HY index was down at B+657bp (-5bp). That’s only 11bp off the wides we saw a few days ago, highlighting the very laboured recovery in cash valuations. Finally, iTraxx Main closed at 114bp and off the earlier session low of 110bp, while X-Over was at 455bp – also well off an intra-day low of 438bp.

The US closed out up around 1.7% (S&P), so we look for a better start. 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.