23rd November 2016

What about us?

MARKET CLOSE:
FTSE 100
6,820, +42
DAX
10,713, +29
S&P 500
2,202, +4
iTraxx Main
80bp, -1bp
iTraxx X-Over Index
340bp, -5bp
10 Yr Bund
0.22%, -5bp
iBoxx Corp IG
B+139.3bp, -0.5bp 
iBoxx Corp HY Index
B+438bp, -1bp
10 Yr US T-Bond
2.31%, unchanged

Restoring some order…

SES: Amongst the deals that flowed yesterday

A broad equity rally took the DAX back into the black (for the fourth time) this year, albeit for a brief period. Oil as measured by the Brent contract was closing in on $50 per barrel again and government bond markets were better bid, allowing for yields to fall – for once investors probably thinking the sell-off had gone too far. Even Italian 10-year yields dropped below 2.0% at one stage.

News flow was light, but looking around for excuses to explain the moves proffer a disjointed picture. Bonds might have been better bid because of election jitters across Europe as we potentially lurch to the right. That fear ought to have made for lower stocks, but it seems the better performance int he US overnight held more sway. For oil, just hope of an OPEC deal!

As for credit, more of the same. That is, little interest in the secondary market (admittedly finally better bid for choice), with focus on a resurgent primary sector. We had four non-financial IG corporate deals. And some testier ones too, suggesting that risk appetite is still intact and the recent weakness in secondary markets was down to jitters around Trump’s economic policy and the relative panic in rate markets. And nothing more sinister. Deals are still be 3-4x oversubscribed and final pricing tightened by 10-15bp versus initial guidance as has been the case for most of this year.

We are being left behind though. Stocks have a habit of gaining or losing a percentage point or two per session, while government bond yields can move 3-4bp in the lowest beta segments – up or down. Corporate spreads – when measured on a cash index basis encapsulate a relative lumbering dynamic. We have widened 15bp (Markit iBoxx) on the index in the past week or so, and even the markets stay positive between now and year-end, we will be lucky to recover that weakness. Carry and a rise in the underlying (government bond market rally) are going to be the main drivers for any noticeable performance between now and the end of 2016.

Finally some deals to restore our faith

suedzucker

€300m deal for Europe’s largest sugar producer

It looked like it was all over. Mandates were being awarded, roadshows ongoing and investor calls made in order to gauge interest from the market for deals. But after several sessions of drawing a blank, we had SES, BP, Suedzucker and Heineken refreshing this part of the market. BP raised €925m in a long 7-year deal while Südzucker clipped just €300m in the same big figure maturity.

The deal which caught the eye, though, was the hybrid transaction from SES which took an increased €550m yielding 5.75%. Heineken finished off the day’s flow with a 10-year deal for €500m. The total for the session (and the week thus far) was €2,275m – bringing the monthly total to €18,875m for issuance.

The rest took in a covered bond deal, a senior offering from Grenke Finance for just €150m and some SSA issuance.

Looking for markets to carry upbeat tone on

It’s been a while since all markets rose in unison, and we could do with more of the same in sustainable fashion for these final few trading weeks of the year. The 10-year Bund yield declined to 0.22% (-5bp), the equivalent Gilt yield was down at 1.36% (-6bp) while BTPs came off their lows to leave the 10-year yielding 2.02% – but still 5bp lower in the session. Some of that Bund move might be technical/opportunistic given that the 5-year yield dropped 6bp to -0.44% and out of the reach of the ECB’s tentacles (they have a -0.40% yield limit).

Whatever, it’s good news for fixed income total return players as it boosts their performance – and everyone is watching it on a daily basis  given we are so close to year-end!

The DAX failed to hold on to earlier higher gains, ending the session at 10,713 (+0.3%) and 30 points off being flat for the year into the close. Other equities were closed out all in the black. the US market was little more mixed, nervous probably about setting yet another record closing high. We’ve had a few of late.

In the corporate bond market, we edged a little better to leave the Markit iBoxx index at B+139.3bp (-0.5bp) although the index yield fell 5bp (to 1.25bp) and returns on the back of it improved a little. The sterling market was in copycat mode, also edging a touch better having widened for seven consecutive sessions.

The HY market gained a little but nothing exciting in a dull session. And it didn’t end there, with the synthetic indices also only edging better, as the cost of protection fell to 80bp (-1bp) on Main and 340bp on X-Over (-5bp).

That’s all folks. Back 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.