8th July 2016

We will work it out

MARKET CLOSE:
FTSE 100
6,534, +70
DAX
9,429, +46
S&P 500
2,098, -2
iTraxx Main
82bp, -1bp
iTraxx X-Over Index
366bp, +2bp
10 Yr Bund
-0.17%, +1bp
iBoxx Corp IG
B+148.6bp, -1bp 
iBoxx Corp HY Index
B+506bp, -2bp
10 Yr US T-Bond
1.39%, +2bp

What a week!…

0.73%, -0.20%, 1.32%, -13% and 1.06%. These are, respectively, the record lows seen this week on the 10-year Gilt yield, the equivalent maturity Bund and the US Treasury. The performance of the DAX index year-to-date (it’s been worse) and the Markit iBoxx index IG corporate bond yield (YTD low) make up the final two numbers. We’ll add a couple more while we are in upbeat mood, they’re 9.5% for sterling corporate bond market returns and 4.7% for euro-denominated IG corporates.Good-bad-ugly-clint There’s a bit of the good, the bad and the ugly in this concoction.

Draghi and other central bankers need us to spend our cash or borrow – and for banks to lend. We’re not having it. Policy rates and bond yields are not at these levels because the outlook is bright, or about to improve. QE isn’t being ratcheted up because the high levels of indebtedness don’t need servicing by ever-lower interest rates. No, we suspect that we are more likely going to accept low(er) returns – or in due course, depending on how deposit rates evolve, stuff it under or in the mattress. We will know that our capital is safe and we will also know exactly what the risks are – fire and theft, with perhaps a little temptation always to spend a little of it as prices drop.

The global economy is in dire straits. Brexit, in our view, is an excuse. We would have got to this point in due course anyway. The referendum result just accelerated it and did away with the slow grind lower/weaker in everything we were experiencing. The difficult decisions at a political level are not being taken – no reform, no structural changes, no growth, no investment and no spending. Or too little of it all – and too slowly. That’s why we think the 10-year Bund yield is likely going to -0.35%. Why eurozone/global growth predictions will be seen to as being too bullish. And why the ECB and other central banks will be embarking on more QE.

Some respite into non-farms

With US non-farm payrolls due today, Thursday’s session was one of consolidation. Hard news flow was light, giving most the chance to take stock of this week’s market gyrations, perhaps square up some shorts and book profits. Even sterling managed to move higher versus the dollar, with cable back at $1.30. The FTSE also continued to outperform as it rose by over 1% versus the 0.5% seen in most other Eurozone bourses, although all markets closed considerably off their session highs.

We also saw some weakness (if that is what it was) in government bonds with yields backing up a touch off the record lows seen previously. The 10-year Gilt yield backed up to 0.78% (+1bp), the equivalent Bund to -0.17% (also +1bp) while Treasuries yields were a touch higher too at 1.39%. Oil edged lower, giving up earlier gains with Brent trading off a $46 per barrel handle (-4.5% in the session). This came after US crude inventories fell by less than expected last week.

In credit, primary was focused on the second Resolution Note (senior) from Nykredit, which priced 17bp inside the initial guidance for €500m, and in a 5-year maturity. Non-financials drew a blank for the second day in a row, and we just have the 4-tranches from ASML and Total for a combined €4.25bn so far this month. We have to believe that Brexit-related fears will start to subside next week, or at least that the impact the news flow around it is having on the market will. Primary markets seem to have been caught up in the brouhaha, but only when the market reaction elsewhere is extreme.

Otherwise, it is a “borrowers market” and there is money to be put to work that is both willing and able. Now’s as good a time as any to get funding in, if needed. We would think that the next two weeks will be “it” for meaningful primary activity before the holiday season gets going.

While sometimes, “predictable” is most welcomed

In the secondary market, a light session still had cash spreads move better – what else? The Markit iBoxx IG index edged a basis point lower to B+148.6bp, while the index yield was unchanged at 1.07%. Returns YTD are still at a very good 4.7%. Pressure around the Italian banking sector is having but a small impact on the border market, with just moderate weakness in the CoCo market (for example), which eventually left the index yield up at 8.37% (+4bp).

The HY market was pretty much unchanged in an unexciting session, with the index left at B+506bp (-2bp). For the indices, it was mixed session with Main lower at 82bp (-1bp) and X-Over up a touch at 366bp (+2bp).

Have a good weekend, back 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.