14th October 2016

Whip it good

MARKET CLOSE:
FTSE 100
6,978, -46
DAX
10,414, -109
S&P 500
2,133, -7
iTraxx Main
75bp, +0.5bp
iTraxx X-Over Index
337bp, +2bp
10 Yr Bund
0.04%, -3bp
iBoxx Corp IG
B+124.9bp, +0.4bp 
iBoxx Corp HY Index
B+429bp, +2bp
10 Yr US T-Bond
1.74%, -3bp

Eyes back on macro…

british-pound

GBP: Unfairly pounded?

We’re probably needing a catalyst to give the market some firm upside direction. Because at the moment we are yo-yoing to some fairly innocuous headlines. And when they don’t come, we make them up – or take a (negative) punt on sterling – the market’s current whipping boy.

Overall, it has been a difficult week for risk assets with little chance of a break to the upside emerging and most content to stay sidelined or reduce some risk. It’s almost as if we are in that slipstream into central bank policy change. We are not.

There will be no change from the ECB or the BoE, although we might get a rate hike in November from the Fed (more likely December). So, a month and quarter which promised much as we emerged from a difficult September has failed to deliver. There is a chance that we waste the final two weeks of the month fretting about “something” that is unlikely to happen.

Yesterday’s session was one of weakness for risk assets which lent some support for government bonds as Chinese trade data came in particularly weak. Just when we were getting a little complacent about what’s going on in China, the weak export data (-10% yoy in September, in dollars) reminded us that macro risks haven’t left us at all.

Stocks started on the back foot, and losses only accelerated into a weak opening in the US. European stocks were down by around 1.0% while US markets saw falls of up to 0.7%. The macro jitters were a support factor for government bonds, and we saw lower yields across the board. US Treasuries in 10-years had yields of 1.74% (-3bp), the equivalent Bund yield dropped to 0.04% (-3bp) and even Gilts rallied with the 10-year back below 1% at 0.98%, before closing at 1.02% (-2bp). Elsewhere, oil was choppy amid news that US stockpiles had unexpectedly grown (Brent dropped below $52 per barrel) and sterling played out the same way anchored a few ticks either side of $1.22.

It has left us with a fair bit to think about, but it plays into the hands of the corporate bond market. Macro is still not blowing hot, nor is it too cold – but enough for the central banks to keep policy as easy as possible (forever).

As such, we continue to believe the rally in government bonds of late was overdone, that the tapering speculation was mischief making while the Fed will defer raising policy rates until December at least. Lower underlying yields and choppy stocks (absent any huge moves) ought to help the corporate bond market. We are surprised issuance in non-financials has spluttered. So we are looking for spreads to gains some upside from that weaker supply dynamic as the ECB stays ever present in secondary credit and investors look to add what they can before year-end to use up any necessary cash balances.

Non-financial corporate issuers absent again

warner-bros

That’s not all, folks: 8NC3 deal for Warner Bros

Primary credit was busy but dominated again by financials issuing covered bonds, while real estate investment group Goodman European printed a dual-tranche deal for a combined €650m. There was nothing in IG non-financials, although the HY market delivered €345m of issuance with a 8NC3 deal from Warner Brothers.

That leaves us with €895m issued in HY this week as we enter the final the session of it, and just €5.95bn in IG. For the latter, that’s €10.4bn for the month at the halfway stage and at this rate, we will be thankful of €25bn by month-end.

We are aware that there is a burgeoning pipeline and that the demand for corporate bond risk is elevated, but that isn’t enough to entice borrowers into printing deals, it seems. Rate markets might be choppy, but costs for borrowers are still excellent. Maybe the market has just overcooked supply expectations. If it has, we have to expect a better tightening dynamic in secondary for corporate bond spreads.

Credit closing flat for the week again

The market closed out pretty much unchanged in the session, and at B+124.9bp (Markit iBoxx cash index) the IG corporate bond market is closing out unchanged for the week. We’ve thus far outperformed stocks and government bonds, displaying a comforting degree of stability and none of the volatility of other asset classes.  On an equally positive note, the BoE has lifted £1bn of its intended £10bn (over 18-months) after two weeks of corporate bond market operations. That’s good going in a more so illiquid market than dollars/euros – meaning good support for spread valuations. Sterling IG credit closed unchanged but index yields dropped 3bp on the back of the rally in Gilts.

In HY, the Markit iBoxx index was 2bp higher at B+429bp suggesting this market was also doing very little in the session. Admittedly, there is little happening in secondary – and it’s been like this for a while, while most investors would have been focused on the rare Warner Brothers deal. the indices closed out in very measured fashion with Main at 75bp (+0.5bp) and X-over at 337bp (+2bp), suggesting no panic (to hedge etc) by corporate bond market investors.

Have a good weekend, back on 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.