Suki Mann

Author Archives: Suki Mann

1st December 2015

Taking the bull by the horns

MARKET CLOSE:
FTSE 100
6,356, -19
DAX
11,382, +88
S&P 500
2,080, -10
iTraxx Main
69.5bp, -1bp
iTraxx X-Over Index
289bp, -5bp
10 Yr Bund
0.47%
iBoxx Corp IG
B+151bp, -0.7bp 
iBoxx Corp HY Index
B+474bp, -2bp
10 Yr US T-Bond
2,21%

Some lead, others follow… Some are sitting and waiting, others are not. Well, Austrian utility OMV was straight out of the blocks with a dual-tranche hybrid deal and ISS Global with a plain vanilla effort. And these are the types of juicier transactions the market wants, almost craves. Because they offer yield. Well, it will crave them if Draghi duly delivers on Thursday, because underlying yields will be heading lower and the corporate bond market might revisit the sort of halcyon-like period it once enjoyed – like back in Q1 2015. Admittedly, it’s had a great run since the crisis began, but it looked like corporate spreads (index basis) were going to zero as high and low beta credit compressed à la Japan. That came on the back of the original QE announcement, having fretted on the prospect of deflation, zero rates, low yields and no growth to look forward to. And where the mattress beckoned, or the last great bastion in the fixed income market which offered some yield, the comfort of a very low default rate (and rating transmissions risk) and your money back at maturity – that was the corporate bond market. Sullied by the performance in Q2 and most of Q3 – where we pulled back hard on the back of a slowing China, emerging markets growth worries generally and the impact on global growth, higher US policy rates and a fair dollop of idiosyncratic event risk where all markets lost their way – we are now back. Those aforementioned worries haven’t left us, but we will rally if the ECB delivers later this week, and we will likely do exactly the same if the US raises rates later this month.

The market expects… It was a really strong session on Monday, and we can only think that comes off the back of huge expectations regarding further easing from the ECB. The quarter so far has seen some stock markets rise by almost 20% (DAX), and while some of Monday’s upside (+1%) might have been gained on the back of month-end position squaring, we still think it is all about the ECB. Fingers crossed that it’s not an ugly Thursday!

OMV finally bites the bullet… They waited as long as they could for better conditions (pricing), but finally bit the bullet and got dual-tranche Eur750m deals away. The PNC10 offered a 6.25% yield and the PNC6 5.25% in what appears to be one of the cheapest IG hybrid deals in the market. Combined books were a little over Eur4bn. The triple-B rated ISS Global came with a Eur500m no grow, 5.5-year offering which was finally priced at midswaps+100bp, and that was off the back of IPT of midswaps+115bp. The deals ended the month with some Eur26bn printed in the IG non-financial corporate sector (Dealogic data).

Secondary remains friendly… With stocks up as they were, credit was always going to be in decent shape too. Government bond markets didn’t really manage to rally into it. Overall though this is all about positioning in anticipation of a wide-ranging, all-singing, all-dancing ECB grab-fest announcement come Thursday. And although focus in the corporate bond market was on month-end valuations, portfolio tidy-ups and the deals in primary, we managed to edge better again in secondary markets.

That’s November over, we’re into the final chapter.. have a good December.

30th November 2015

Stand and deliver

MARKET CLOSE:
FTSE 100
6,375, -18
DAX
11,294, -27
S&P 500
2,090, +1
iTraxx Main
70bp, +0.5bp
iTraxx X-Over Index
291bp, +1bp
10 Yr Bund
0.46%
iBoxx Corp IG
B+151.7bp, unch 
iBoxx Corp HY Index
B+476bp, +-6bp
10 Yr US T-Bond
2.22%

Draghi and his chums will deliver… After all, when the wallahs at the ECB take stock, they ought to see a eurozone economy struggling to break free from the shackles of deflation, with little material credit growth in the right areas leaving a difficult outlook for sustainable growth prospects; but also a world fraught with an increasingly tense geopolitical order. China is in the throes of a multi-year rejigging of its economy at just about the wrong time as far as the rest of the world is concerned. The US can and will (we believe) go it alone for a while, but might need to do an about turn some time in 2016. And the eurozone is simply in the doldrums. This is when consensus politics needs to come together and do the right thing. The markets are telling the ECB that it needs to deliver on December 3 – or else. Government bonds are certainly positioned for further easing in some format, with front-end yields hitting or parked at record lows on a daily basis. Likewise for the stock markets, which have recorded an impressive recovery of late. Credit isn’t necessarily “positioned” for it, in the sense that we don’t think there will be a major investor-driven sell-off derived from a significant reduction in risk if the ECB does nothing. There will be sell-off in government bonds, equities will head south and credit spreads will in the main be marked wider. Few will sell, as rebuilding positions will be expensive if not impossible. Nevertheless, the hard-won recovery in performance since the tragedy of August/September could be lost in a flash and returns slashed through what would be a difficult December. That is because in thin markets, which December will provide, the marginal buyer (tourist money) might scramble to get out while still ahead. This would exacerbate the downside in a battle-weary market with wafer-thin liquidity. We however prefer to remain optimistic, and Draghi has usually delivered. That means the current boom in the stock market will continue, government bond yields will fall some more – with the 2-year Bund possibly visiting -0.55% – and credit spreads will tighten through the Markit iBoxx B+150bp level for IG corporates (finally), leaving benchmarked corporate bond returns easily in the black for the year as 2015 draws to an end.

Good month for corporate bonds… We closed out last week just a little better, with higher beta risk gaining most. There were no deals in primary, but the month turned out to be a decent one with some Eur24bn getting done in IG non-financials, according to Dealogic data (sixth best month this year). We think the primary market will stay open for another couple of weeks. It’s been a decent month for the corporate bond market from a performance perspective, and for those total return players in particular. They needed it! IG returns YTD are now positive at +0.2%, which might not seem like much but it’s a good reversal after being down -0.6% a couple of months ago. Spreads are 40bp wider in the year to date though, as measured by the Markit iBoxx IG corporate bond index. In IG, November returns are +0.8% and spreads have only tightened a couple of basis points, as the focus has been squarely on the primary bond market. In HY, spreads have tightened 6bp in the month, returns for November are also around 0.8% and YTD the HY bond market has returned a touch below 3%. We had targeted annual returns in IG of 2-2.5% and for high yield of around 4-4.5%. The sell-off in the Bund from those Q1 levels has not helped the IG market (longer duration), while the HY market has benefited from the anchoring of the front end of the government bond curve.

Squeaky bum time until December 3… That it will be. We’ll all be looking for clues into that Thursday meeting. But in reality, there will be no big advantage for anyone, we believe. Not to forget the non-farm payrolls report which be released on Friday. There is a rate hike coming in the US two weeks later. This looks priced in now, and should help markets stay on the front foot into the end of the year, albeit in extremely thin markets.

Have a good week.

27th November 2015

Happy days

MARKET CLOSE:
FTSE 100
6,393, +55
DAX
11,321, +151
S&P 500
2,089, closed
iTraxx Main
69.5bp, -1xbp
iTraxx X-Over Index
292bp, -5bp
10 Yr Bund
0.47%, unch
iBoxx Corp IG
B+151.8bp, -0.25bp 
iBoxx Corp HY Index
B+481bp, +1bp
10 Yr US T-Bond
2.23%

Thin markets but a brighter close to the week… On an index basis, we’re back in the black, though we suspect most investors running with a beta greater than their index of choice have been showing positive (IG credit) returns for a while. They will not be up at the 2-2.5% area we thought could have been the case when we started out this year, but positive returns with little of the associated macro volatility impacting stocks isn’t to be scoffed at in an asset class that is meant to be fairly unexciting. Recall that the DAX, for example, has been up 25% and down 3% in the space of five, very difficult spring/summer months. Spreads are wider by 40bp YTD when we were looking at them being tighter by 20-25bp; while government bond yields in say the 10-year area have jumped higher (on their way down again now) after that incredible first quarter. Throw in Glencore, BHP and a lot of Volkswagen and it is small wonder we are not rallying as we might have expected given the positive undertones this month in the credit market. We think that the associated idiosyncratic event risk has seen contagion spread its tentacles too much, but can understand it given the quite atrocious liquidity in the secondary bond market. Most have therefore continued to seek solace and risk through the primary market. Oversubscribed deals, not enough deals and issuers being able to tighten up new issue premiums easily are the price investors are paying as they seek safety in numbers.

Primary still functioning… The US might have been closed for its big Thanksgiving fest, but we were open elsewhere and it was business as usual, albeit in thin markets. New issue markets gave us a rare issuer in Exor (the Agnelli family holding company) – which was rather cheap even for a 7-year (Eur750m at midswaps+175bp) suggesting that interest for periphery risk remains high. The unrated Iliad lifted Eur650m also in 7-year funding at midswaps+183bp and off IPT of midswaps+200bp. Swedbank was in the market with a green bond and the deal was a touch tighter on the break. AIB raised Eur500m in AT1 funding. According to data supplied by Dealogic, the YTD IG supply total is now up at Eur257bn and November’s total at a very reasonable Eur24bn, excluding the Eur1.4bn on show today. We’re just a benchmark deal away from 2015 being the second best year ever for issuance (after 2009). We should reach that marker before the month is out.

Secondary expectedly quiet… Such is the development in terms of liquidity int he secondary market, many investors are seemingly loathed to trade in it. The feeling of not getting a ‘fair price’ is becoming an issue for many and might in itself be contributing to the drop in turnover. Still, the market seemed fairly solid as we could expect given the upside in equities in the session again (+1% across the board). We can only hope that the market is not setting itself up for a disappointment on the 3rd of December (ECB meeting), although Draghi rarely disappoints. The Market iBoxx index has again barely moved this week and is still above B+150bp, or +40bp YTD. In a limited session IG and HY  spreads were essentially unmoved. For iTraxx, the synthetics actually outperformed with Main at 69.5bp and X-Over at 292bp.

Have a good weekend.

26th November 2015

ECB: The market expects

MARKET CLOSE:
FTSE 100
6,338, +60
DAX
11,170, +236
S&P 500
2,089, unch
iTraxx Main
70.5bp, -2bp
iTraxx X-Over Index
296.5bp, -5bp
10 Yr Bund
0.47%
iBoxx Corp IG
B+152.1bp, +0.4bp 
iBoxx Corp HY Index
B+480.7bp, +2.7bp
10 Yr US T-Bond
2.23%

Feast starts earlier than expected… It seems like the Thanksgiving party got started a little early, on the final Wednesday of the month rather than the traditional Thursday. Oh, and on the wrong continent. This was a very strong session for all risk assets. It was like we were in a gluttonous haze. We feasted on a Solvay five-tranche deal, with CRH providing the amuse bouches, and then reports that ECB ‘officials’’ suggestions that the central bank was looking at possible deposit rate cuts (in tiered format) and quite possibly expanding asset purchases (and bundling loans) left us heading home hugely bloated. They’re talking a good game and close to kitchen-sinking it, one would think. The market loved it. Stocks were up at the open anyway, shrugging aside concerns around Russian/Turkish tensions, but moved even higher as the prospect of going cold turkey was pushed somewhere into the future. The ECB dare not disappoint in next week’s meeting: the market expects. The euro fell to $1.058 before edging up back over $1.06, while the DAX was up by more than 2% at the end of the session. Government bond markets got a good bid behind them and the 2-year Bund yield closed at a new all-time low (-0.42%) while the yield curve was negative out to 7 years again. The 10-year yield dropped to 0.47% (with the UST/Bund spread anchored at 176bp). Overall, this was a very positive session and the market has legs to keep going into the second week of December, before we ‘up sticks’ for the Yuletide break

Solvay the way to go… The focus for corporate bond market players was primary – as always. They were not disappointed. The deals today highlighted just how much cash is out there to get invested, and perhaps a level of desperation to get it invested before year-end. Solvay was in the market to get the financing in place for its Cytec acquisition. This took in hybrid funding (issues rated Ba1/BBB-), with a Eur500m in a PNC8.5 (at 5.875%) and Eur500m in PNC5.5 format (at 5.125%), and senior deals (rated Baa2/BBB+) starting with a Eur1bn, 2-year floater at Euribor+82bp. There was a 7-year in there somewhere at midswaps+130bp (Eur750m) and finally a 12-year Eur500m at midswaps+180bp. All the deals were priced well through their initial price talks (15-20bp in the case of the senior issues), but they still offered some 40bp of premium. The combined books were around Eur16bn, with about Eur6.5bn of that interest for the hybrids. Solvay’s a good name, but it is a highly leveraged company in a cyclical industry. However, it’s all about yield. And it gave yield. Getting funding for some Lafarge assets it was purchasing, triple-B rated CRH saw interest of Eur3.5bn for its Eur600m deal priced at midswaps+135bp in an 8-year maturity (flat to the curve), and it did a sterling tranche too in a 14-year maturity (£400m at Gilts+212bp). HSBC was the latest of the banks to issue a green bond.

IG credit returns positive again… The long end was better bid and there was a better feel to the market, but in reality, the focus being on the aforementioned new deals meant that the secondary market was firmly in the back seat. On an index level, spreads edged wider for choice and the market is in need to some cajoling to get secondary up and running. Admittedly, given what we have said about secondary market liquidity, that seems like a tough ask at the moment. The Markit iBoxx index closed at 152.1bp but returns for IG credit were back to 0% YTD having been in negative territory since August and boosted today by the rally in the government bond market. For HY, we were also a touch wider, at B+481bp. iTraxx Main though was better offered, lower, at 70.5bp as was X-Over at 297bp with both boosted by the rise in stocks.

We could do with a fairly quiet Thanksgiving session, if only to take in the Solvay deal. have a good day.

25th November 2015

Complacency and market liquidity

MARKET CLOSE:
FTSE 100
6,277, -28
DAX
10,934, -158
S&P 500
2,089, +3
iTraxx Main
72.5bp, +1.5bp
iTraxx X-Over Index
301bp, +5bp
10 Yr Bund
0.52%
iBoxx Corp IG
B+151.7bp, +0.3bp 
iBoxx Corp HY Index
B+478bp, +3bp
10 Yr US T-Bond
2.24%

Staying with the secondary market (il)liquidity debate… Can market liquidity return, naturally – of its ‘own’ accord, almost – following a market correction? We at least are not going to be complacent enough to think it can or will. The large bond market players are currently scurrying around, entrenched deep in thought, trying to find that source of secondary market liquidity as they have much to lose should there be a severe market correction. Saving their skin, so to say – and they have plenty of it in the game. Like others, they might manage to find it in limited situations, but the pain will be great when it comes – and for everyone. A change in the regulatory regime – allowing banks leeway regarding capital allocation for risk positions – is not going to happen. This is politically a no-go area. And therein lies the difficulty. Who will provide it? And the answer is: we don’t know. The European bond market for one lacks the homogeneity of the US market – legal, jurisdictional, documentational and so on. There is also great suspicion between asset managers and much apprehension with respect to exposing positions, strategies and the like, which would give others insight into how they operate. Market suspicion and self-interest are why inter-buy-side platforms always seem to fail. The European corporate bond market is huge – over Eur2trn in corporate bonds outstanding – but every aspect of it is highly fragmented. Following a crisis, there might be bonds flying around as desperate selling to free up cash to fund outflows begets more desperate selling. And there will be value and we suppose ‘liquidity’, but once the market settles, we will be back to square one. We agree that the central banks might be able to limit valuation downside in extremis, but anyone who suggests that central banks can (or ought to) replace the natural order of the market is not understanding the debate or the market function at all. And again, is likely talking self-interest.

Macro takes a back seat to geopolitics… The downed Russian jet allegedly in Turkish airspace saw to it that we had bit of a nervous session on Tuesday. There was only moderate flight-to-quality and admittedly stocks took bit of a hit, but the market reaction was very measured overall. Probably because more generally, the Russians have been brought into the ‘fold’ following the Paris terrorist attacks, and the view might be that the fall-out from this incident will be limited. Whatever, European stocks were down 1.5-2%, and government bonds got a boost and were bid up. The 10-year Bund yield was down at 50bp and the 2-year saw a new record low of -0.41%. They all pulled back into the close with stocks down just 0.5% and bond yields heading a touch higher off those earlier lows. Credit was unchanged to perhaps a little softer, but that goes with the territory, while VW related news – which was not good – keeps on flowing.

Primary subdued… SKF’s deal, flagged yesterday, was out, with a Eur500m, 7-year transaction at midswaps+122bp off a 4x oversubscribed book. Most of the other deals were in the covered bonds area, while BMW opted for a 6-year sterling issue. In secondary, we encountered a dull session. The broader index saw to it that spreads edged a tad wider for choice. The Markit iBoxx IG corporate cash index was up a touch at B+151.7bp, and that sub-150bp seems so elusive right now. The Hy index was a little weaker at B+478bp, in a moderate weakness to be expected given the sell-off in stocks. For the synthetics, we had Main at 72.5bp and X-Over also better bid, up at 301bp.

It’s the day before the day before Black Friday. Can we expect a plethora of deals? It would be nice, but unlikely – and there will be no bargains. Have a good Wednesday.

24th November 2015

Buy, hold, clip coupon… A trader’s nightmare

MARKET CLOSE:
FTSE 100
6,305, -29
DAX
11,092, -28
S&P 500
2,087, -3
iTraxx Main
71bp, unch
iTraxx X-Over Index
295bp, unch
10 Yr Bund
0.53%
iBoxx Corp IG
B+51.5bp, -0.5bp 
iBoxx Corp HY Index
B+474.6bp, -1bp
10 Yr US T-Bond
2.24%

Those were the days… We are not fast approaching any kind of inflection point for the corporate bond market, yet there does seem to be a constant worry about liquidity in the secondary market. That is, in the simplest of terms, the ability to trade at a reasonable price. So we will address it again. First, the debate is quite topical we think because investors (1) are struggling to get hold of enough bonds – this is just a supply/demand issue – and (2) in extremis, like in the case of the problems around VW and Glencore, they are finding that the exit price is too painful. Why are the banks not taking the pain, as they traditionally have? Such has been the development of the market around its gross manipulation by central banks through monetary policy operations that over the past five years, the dumbing down of the traditional risk-free rate to zero has seen a colossal amount of money find its way to the corporate bond market. We were all comforted by the low default rate (despite low/no growth) and higher returns (coupons, spreads). Second, political meddling resulting in what can only be described as subsequently poor regulatory decisions has put the traditional providers of liquidity (the trading desks) on the back foot. We would say that those looking for a return to the good old days (80s, 90s, even early 2000s) are wasting their time. They’re not coming back. So what’s next?

Keep fingers crossed and be reasonable… We don’t usually need to worry about that ability to trade at a reasonable price in a reasonable size until we have a crisis, be it around a single name (VW, perhaps Glencore and Anglo American) or sector (commodities, US shale groups) or a systemic one. We would say that for idiosyncratic risk, it’s just bad luck if one needs to exit on an event. For a sector, it’s poor homework – just do it. As for a systemic issue, everyone’s in trouble. Tough. Fortunately, given the current global macro situation, the potential for a systemic crisis is remote. The central banks might have kitchen sinked it, but they would try and do more if a global systemic financial crisis reared – or even looked like it was going to rear – its ugly head. Phew, all good. Buy, hold, clip the coupon. But actually it’s not quite all good after all. There has to be a time when poor secondary market liquidity will have an impact, and there will be some severe hits taken – by everybody. The big, secular trade to be afraid of involves ‘rotation’ from corporate bonds to equities. The driver? A return to sustainable growth, inflation, higher rates and that missing credit cycle. But that’s not happening any time soon. Rest assured, the current frustrations of the market – supply, demand, liquidity, low rates, low yields, perceived ‘tight spreads’ and ultimately value – will be with us through the whole of 2016.

Macro, commmodities and the default rate – oops… Macro data was actually quite supportive on Monday, with eurozone PMIs coming in better than expected in October and hovering at near 5-year highs for manufacturing and near 2-year highs for the service sector. Only the French ones disappointed. Commodities fell to multi-year lows, with copper and zinc particularly under pressure, although oil rebounded after reports suggested the Saudis were willing to cooperate in creating a more stable market. The default rate in the US rose to levels not seen for a while as the shale bubble deflated, as over 60% of the defaulting companies globally are US-based (mostly concentrated in the oil and commodity sectors). in Europe the rate remains very, very low by any standards – and is expected to stay that way for the foreseeable future.

New issue focus… Autostrade, Danone, with NEPI (New Europe Property Inv) also in the markets, and Greece’s OTE (!) due at some stage along with SKF (both also doing tenders for existing deals). Danone’s 8.5-year, Eur750m deal was priced at midswaps+67bp with the book around 3.5x oversubscribed. Autostrade’s Eur750m long 10-year was priced at midswaps+92bp on a book a little under Eur2bn, but was still touch better on the break. NEPI paid up for a 5.25-year at midswaps+362.5bp (to be priced at the time of writing), despite being a low IG-rated borrower. And with it, they bought up the Eur20bn issuance level for the month. There was a fairly rare dual tranche deal from MasterCard as well.

Secondary subdued and mixed… As regular readers will be aware by now, the secondary market was fairly subdued and little changed. The Markit iBoxx IG corporate bond index ended at B+151.4bp and the HY index at B+475bp. The iTraxx indices were unchanged at 71bp and 295bp for Main and X-Over, respectively. The Bund sold off, USTs caught a decent bid, metals were down again and oil ended flattish in a volatile session.

And with all that, have a good day!

23rd November 2015

Ganging up on the hawks

MARKET CLOSE:
FTSE 100
6,335, +5
DAX
11,120, +34
S&P 500
2,089, +8
iTraxx Main
70.5bp
iTraxx X-Over Index
294bp
10 Yr Bund
0.48%
iBoxx Corp IG
B+152.1bp, -0.25bp 
iBoxx Corp HY Index
B+475.6bp, 2.5bp
10 Yr US T-Bond
2.26%

Red corner or blue corner?… Draghi and Praet versus Weidmann. The Bundesbank’s Weidmann was in typical defiant, hawkish mode on Friday as he pretty much contradicted Draghi and the ECB chief economist’s more dovish stances. Weidmann’s defiance took in the declining oil price and the stimulus to consumption it might provide to the level of core inflation and the definition of medium term. He prefers to sit and wait… and wait. We would think that the red corner will be the winner, and do look for further easing measures to be announced in a couple of weeks’ time. The market believes the same, with the 2-year Bund yield closing at a new record low of -0.40% and the 10-year edging lower to 0.47%, before closing at 48bp. It’s time for the ECB to get off the fence. Allied with the market’s acceptance now that the Fed will raise rates – and with risk assets now in rally mode – we now think that this current better sentiment will see us through to year-end and beyond. Issuers have finally been released from their (self-imposed) shackles and rising stocks will see dealers increasingly reluctant to lose paper as the rising tide of the risk-on trade carries spreads tighter. Finally, we might finally see the Markit iBoxx IG corporate index break through B+150bp – a level it has flirted with for several weeks.

Friday’s deal flow completes an ‘OK’ week for primary… Mercialys (tap), Viesgo (8-year), Elia Systems (8.5-year) and Priceline (7-year) printed Eur2bn on Friday to round off the week and take the IG non-financial deal total for the month to a respectable Eur18bn. With just under a couple of weeks still to go, Eur25bn is still possible. It could be more, but the deal flow just seems to be stop-go for some reason. In financials, BPCE funded in a 12NC7 T2 format for Eur750m at midswaps+237bp, rounding off a decent week of subordinated issuance from the banking sector. We ought to expect issuance levels to pick up in Europe and continue well past the Thanksgiving break (in the US) next week. There are a good three weeks of business still left in this year.

Secondary stable amid primary focus… At least the focus on supply isn’t putting any pressure on the level of the secondary market. The Markit iBoxx IG corporate bond index closed the week at B+152bp, pretty much unchanged for the week and just a paltry 2bp tighter in the month so far (but a whopping 41bp wider YTD). That’s not great to say the least, but the rally in the Bund has helped returns perk up, with credit now showing a loss of just -0.1% YTD on a total return basis. Easily in positive territory on a total return basis is the HY market (around 3%), but spreads here are just 7.5bp tighter in the month. And all that is after some good rallies in the equity markets. It seems that the rise in stocks has only managed to steady the “credit ship” after the carnage at VW and Glencore/Anglo American, while liquidity is about the worst it has ever been in the secondary corporate bond market. It’s just as well that the rotation trade (credit to equity) isn’t going to come any time soon. The driver for that would be sustainable global growth boosting equities, leaving investors to chase capital appreciation strategies rather than the current preservation ones.

No closing for European credit into Thanksgiving… We expect the market in Europe to continue business as usual through the Thursday holiday in the US. Black Friday it will be on the shopping trail, and it would be useful if some of the investor community did their own shopping in the corporate bond market. With spreads going to be tighter by 5-10bp by the time the year is out, in our view time is fast running out to get some paper on board at these better levels.

Have a super week, really.

20th November 2015

No more repeats, please

MARKET CLOSE:
FTSE 100
6,330, +51
DAX
11,085, +125
S&P 500
2,081, -2
iTraxx Main
71bp, +1bp
iTraxx X-Over Index
295bp, +0.5bp
10 Yr Bund
0.48%
iBoxx Corp IG
B+152.25bp, -0.25bp
iBoxx Corp HY Index
B+477.5bp, -2.5bp
10 Yr US T-Bond
2.24%

Welcome to the corporate world… Spreads unchanged, supply underwhelming, Bund yields a little lower but returns in IG credit edging closer to positive territory year-to-date. We may as well just finish off this Friday with the same comment as a week ago! We’re a week away from Thanksgiving and just a couple of weeks away from the next ECB meeting, and then up comes the Fed. The next stop for the UST-Bund is 185bp (177bp currently); for equities we’re thinking “rally” as the Fed move will have no impact – more likely relief; and for credit, IG returns will be back in positive territory. We hope that comes about because spreads will have started to tighten, but most likely it will be driven by the bid for the underlying (government bonds) as policy diverges between the ECB (looser) and the Federal Reserve (tighter). Measuring the state and/or performance of the corporate bond market through the broad, far-reaching Markit iBoxx index, spreads are stuck at a little north of B+150bp but returns, having been down almost 1% YTD in September, have clawed their way back to almost zero YTD.

Secondary needs a boost to generate some activity… But it is unlikely going to come any time soon. The technicals of an illiquid market are coming home to roost. And the current buy-and-hold dynamic is going to be with us for many years, as are the consequences of it. Right now, the better complex of the market makes it easier to sell than to buy. And the poor offered side part of the equation is strangely not acting as a catalyst in promoting a tightening trend. Where there might be opportunity – to buy or sell – in miners’ bonds, for example, it appears that much of the Street has stopped or won’t trade these names any more. We can’t blame them, as they are only a headline away from potential disaster in a sector which is likely to remain under pressure and suspicion for a while yet. We won’t be seeing any primary from it, that’s for sure!

And as for primary… Spain’s RTE was the cock o’ the north so to say, with a Eur1bn deal at midswaps+82bp for 10-year funding, and Elia Systems likely today (Friday). We had some senior and T2 financials with the Allied Irish T2 deal reportedly 5x oversubscribed – not bad for a single-B rated deal. The BNP T2 deal (Eur750m) was also well-received, and both were trading up on the break.

So, how did it all finish?… The Markit iBoxx IG index was a little tighter for choice at B+152.25bp – unchanged on the week. The HY index was 2.5bp better at B+477.5bp – again barely moving this week. iTraxx Main was up at 71bp and X-Over unchanged at 295bp. The 10-year Bund and UST yields moved in tandem, the difference in 10-years left at 176bp. The 2-year Bund yield was at a record low at the close of -0.39%. US stocks were flattish but European ones were anywhere up to 1% higher (DAX). Copper prices were again lower and oil was volatile in a tight range. The data from the US exhibited some resilience against the global macro headwinds and points to a hike in rates come that December FOMC.

Wishing you all a super weekend, back Monday.

19th November 2015

…the tough get going

MARKET CLOSE:
FTSE 100
6,279, +10
DAX
10,960, -11
S&P 500
2,084, +33
iTraxx Main
70bp, -1bp
iTraxx X-Over Index
294.5bp, -2.5bp
10 Yr Bund
0.50%
iBoxx Corp IG
B+152.5bp, unch 
iBoxx Corp HY Index
B+480bp, -1.5bp
10 Yr US T-Bond
2.27%

The going was about to get good… As ever in these markets, we don’t seem to get much traction for more than a day or two. Equities have a blinder one day, then a seemingly much-needed rest. Government bond markets rise and fall to the tune of the headlines and what might be thought to have an impact on the thinking at the Fed and the ECB. Commodities are not quite in a world of their own, but are deeply attached – as one would expect – to what is happening (or going to happen) in China. Credit continues on its merry way. We tighten – usually – when stocks rally; we are sidelined when they sell off. Even the traditional flight-to- quality trade has bypassed the corporate bond market. It should not. Credit ought to be viewed as the ‘quality’ in ‘flight to quality’, but old habits die hard. We should not be surprised there. Investors just seem happy to pay for Bunds: the 2-year yield was at a record low of -0.38% again today (also the yield at auction of new bonds). We’d think that cash under mattress would be a better trade.

Focus on primary, time to play another record… We suggested yesterday that investors ought to look more closely at the secondary market, because the focus on primary will not reap the desired rewards – for anyone. There just isn’t enough supply. And today, while the market was busy, it was green bonds in financials, covered bonds, SSAs and just BAT the flag carrier for non-financial corporates. BAT issued in sterling in a 40-year maturity at a tighter than initial guidance of Gilts+157bp, following on from Mondelez’s 20-year deal earlier in the week. The Eur600m deal at midswaps+68bp for 6.5 years with a 4x subscribed book at least took the monthly supply for investment grade non-financial issuance to Eur15bn. We’re not sure what that really means, except that it isn’t enough issuance to soak up the sidelined cash. There is liquidity in the secondary market, it is not hard to find and we think one is better off there. The risks of a sell-off between now and year-end are declining and we think spreads are generally going to go tighter, hence there is good upside to using this approach.

And the rest… Oil prices (WTI) flirted with a sub-$40 per barrel level. The UST-Bund spread closed at the record wide of 177bp. US stocks were up 1.6% at the close on relief that the Fed is going to put us all out of our misery and raise rates, with a measured path for further increases thereafter. We’re finally moving on! IG credit edged a tad better (Markit iBoxx IG corporate index at B+152bp) and the HY index was a touch lower too at B+480bp (-1.5bp). Small moves all things being considered, there has to be more to come. In line with the small moves in European equities, iTraxx Main was down at 70bp and X-Over at 294.5bp.

We should open better today on the back of the big rally in US stocks. It’s Thursday, treasure it.

18th November 2015

Fortune will favour the brave

MARKET CLOSE:
FTSE 100
6,269, +122
DAX
10,971, +258
S&P 500
2,050, -3
iTraxx Main
71bp, -3.5bp
iTraxx X-Over Index
297bp,-17bp
10 Yr Bund
0.52%
iBoxx Corp IG
B+152.8bp, -0.5bp 
iBoxx Corp HY Index
B+481.5bp, -2bp
10 Yr US T-Bond
2.26%

Time to show some flair… The UK remains in deflation, China warns on an increasingly difficult external demand environment, oil goes up and down by a dollar or two in the same session but is at multi-year lows while stocks go through the roof. Government bond yields in the eurozone are unchanged but showing a growing divergence with the US, yet the corporate bond market is languishing. We don’t get it. All the tea leaves are well-aligned for corporates being the fixed income asset of choice. Low levels of economic growth for longer, low rates for an extended period, low yields for an age and a supportive default and rating transmission rate all lead to the corporate bond market. And we all know the demand is there. It’s time to move away from the herd mentality of investing and add some more risk through the secondary market, liquidity permitting (and it will be, if one picks and chooses one’s bonds and moment). The new issue market is not really going to be your friend, such is the demand for paper through this avenue; nor will it necessarily be the most efficient way in which to get some. Deals being oversubscribed 3-6x means that disappointment will be there for everyone, large investors and small, as allocations are scaled back. Spreads have barely moved this month – in fact they have edged a touch wider. We think it’s time to stick our heads above the parapet and start looking a little harder into the opportunities that the secondary market presents.

Deal flow picks up, secondary still muted… US-based Magna International tapped the markets for Eur550m at midswaps+127bp in 8-year funding. German-based REIT Alstria came with a cheap Eur500m deal at midswaps+205bp, while shipping group AP Moeller was funding in 7-years at midswaps+110bp, taking Eur600m in the process. There was just a Eur1bn book on the Moeller deal. The deal total MTD with this trio of transactions is up to a little under Eur15bn now. Not to be left out, Mondelez gave something to sterling investors with a 20-year deal. The rest came from banks, covered bonds and other SSA deals. We’ve had to wait a while, but it was a good day on the primary front.

Stocks rocket, the UST-Bund spreads sees a new record… Better than expected earnings from Wal-Mart and Home Depot alongside a pick-up in consumer prices (+0.2% in October) boosted equities in the US, while helping promote bit of a sell-off in USTs. Over here, stocks were already in the ascendancy after the previous sessions’ gains in the US, and managed gains of 2-2.5% on most bourses. The Bund sell-off was contained, leaving the UST-Bund spread at around 175bp. The euro fell to $1.06. In the spread markets, we had a slightly better day again, but it was relatively quiet once again. To close, the Markit iBoxx IG corporate index was left slightly lower at B+152.8bp as was the HY index at 481.5bp. Main and X-Over fell too, were better offered, with Main at 71.5bp and X-Over 17bp lower versus the previous close at 297bp.

Have a good Wednesday.