20th April 2016

Who let the dogs out?

MARKET CLOSE:
FTSE 100
6,405, +52
DAX
10,350, +229
S&P 500
2,101, +6
iTraxx Main
70bp, -1bp
iTraxx X-Over Index
302bp, -6bp
10 Yr Bund
0.17%, +1bp
iBoxx Corp IG
B+147.4bp, +1bp 
iBoxx Corp HY Index
B+499bp, -8bp
10 Yr US T-Bond
1.79%, +2bp

Don’t cry for me Argentina…

rabobank

CoCo issue: Rabobank

We’ve shrugged off the doubts, put to one side the ifs and buts and decided that the world is a better place. We can handle oil going lower or higher, we can get through Brexit, and uncertainty around China and global growth is so yesterday. The Ifo/ZEW economic surveys point to improved confidence from the business community in Germany. What’s not to like? In this mood, we only want to rally. Tuesday was an excellent session for risk assets. When we’re talking about the S&P close to record highs, or the DAX index adding 200+ points again and heading for close to flat YTD, then the going is good. These indices lift all boats when they’re in this mood. Government bonds came under some pressure in a classic asset repricing move. The corporate bond market fed into the better tone. This was most evidenced through the indices, which moved smartly lower on the improved sentiment, while cash was also in good shape and higher beta risk benefited most. Primary, as far as non-financial corporates were concerned, was very light however, with just Carrefour on the screens, while the financial deal of note was Rabobank’s contingent convertible issue.

Mauricio Macri

Argentine President Mauricio Macri: His country’s economy ended 15 years of financial isolation

And as for Argentina, it looks like there are only tears of joy in Buenos Aires. Order books of over $65bn for upsized $16.5bn of sovereign debt issuance for a country just emerging from default. That’s as fantastic as it is incredible. They are a direct beneficiary of the ongoing emerging market rally. Great timing. The bonds were trading up in the grey. The headlines only this past week have been about the growing default rate, how the high yield market (in the US, admittedly) has undeservedly rallied off the wides and there is more downside to come. It would seem that few are paying attention to them, although the quality of the book might make for interesting viewing. Let’s hope there is no US rate talk anytime soon.

Rising tides, we just love ’em

The stunning deal for Argentina and the equity rally have combined to inject a super feel-good factor into the market. The timing is good, as it ought to help the markets push on through the rest of this month. We’ve now just about righted the wrongs of January and February as all markets push into positive territory for the year, save for some small losses still YTD for a few European equity indices. Everything else is pretty much in the black YTD. For credit, with so little corporate issuance in the past week, frustrations are high. Lifting bonds is difficult as dealers don’t want to let much inventory go, hoping also to benefit from the better tone, while the situation has been exacerbated of late as poor secondary market liquidity offers little assistance. That means prices are going up, spreads are tightening and we have a taste of what’s to come once the ECB comes shopping. Some paper is coming out, but it is mostly low beta in nature and non-eurozone domiciled names. Importantly, it is having no negative impact on the market.

Lighter primary for corporates but plenty of distraction

There was only one borrower in non-financials in the market today, and that was French hypermarket giant Carrefour. As usual, their deal was finally priced some 20bp inside initial price talk for an 8-year maturity for €750m on books 5x subscribed. The total climbs steadily to €22.85bn MTD for non-financial issuance. Much focus was on Argentina’s deal, but there were also several covered bonds, Depfa’s 4-year €500m issue was 5x oversubscribed while Rabobank took €1.25bn in PNC5 AT1 format with a 6.625% coupon – inside the 7% guidance talk. This deal was also 5x subscribed.

And finally, the DAX’s continued recovery sees it now less than 4% down YTD – it was 19% down less than a quarter ago. All bourses added 1-2% in yesterday’s session. The S&P sidled up to 2,100. The magnitude or otherwise of the moves are welcomed, but more that given the still difficult macro background, they’re closing – in some cases – on record highs. Interestingly, US Treasuries only lost a little, the 10-year yield backed up just 2bp to 1.79% while the equivalent Bund yield was up at 0.17% (+1bp). Brent was back up at around $44 per barrel, a rise of 2.5% in the session.

In credit, IG corporate spreads moved a basis point lower on a cash index basis with the Markit iBoxx index recording another low for 2016. The action was with the higher beta areas, with CoCos and corporate hybrids both in the ascendancy. The high yield market continues to be better bid too, the Markit index now at B+499bp and the yield dropping to 4.74%. Curiously, the iTraxx indices only managed a small tightening and we would say effectively underperformed. Main was just a basis point lower at 70bp and X-Over was holding above 300bp, at 302bp (-6bp in the session).

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.