Suki Mann

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17th November 2015

Man in the mirror

MARKET CLOSE:
FTSE 100
6,146, +28
DAX
10,713, +5
S&P 500
2,053, +30
iTraxx Main
74.5bp, +0.5bp
iTraxx X-Over Index
315.5bp, +5,5bp
10 Yr Bund
0.53%
iBoxx Corp IG
B+153.3bp, +0.5bp 
iBoxx Corp HY Index
B+483.8bp, +3bp
10 Yr US T-Bond
2.27%

A day for reflection… Monday was always going to be a difficult day. Digesting the weekend’s events took priority, and the sombre mood was reflected in the session. Equities moved in a narrow range, secondary spreads were effectively unchanged to a touch better and the primary window was closed as market participants paid their respects to the Paris victims. The two bits of macroeconomic news that stuck out were the eurozone inflation numbers for October being revised up to 0.1% from zero, and the price of copper falling again to a new multi-year low. 0.1% is absolutely nothing to cheer about and within a noise (error) limit, but the drop in the copper price is more worrisome. The Chinese economy could be falling off a cliff, and the repercussions of this will be felt globally. Growth, demand, supply, rates, valuations and inflation will all be affected and, of course, they all heap continued pressure on the eurozone and we think even its existence as a single currency zone in its current format. That might be a long time off still, as the political will to keep it going remains resolute, but the cumulative impact of poor global economics allied with an increasingly difficult geopolitical arena are starting to add further pressure points. Position for low rates and low growth ion the eurozone; be comforted by the low default rate – and clip that coupon.

Ready for greater activity on Tuesday… Spread markets closed out effectively unchanged. Equities were also slightly better for most of the session so had little impact on cash credit but we saw previously under pressure oil/commodity-linked corporate bonds finding some support as oil prices rose early on. There may have been a touch of weakness around corporate hybrids, but elsewhere the session closed out with little altercation. Into the close, oil was back down at fresh multi-year lows, but with US stocks strongly up overnight, it ought to be an upbeat start for valuations in Tuesday’s session! Credit generally moves slowly in an illiquid cash market.

Light fingered markets… Low volume and activity made sure that there would be no major lurches in spreads. Eventually, the Markit iBoxx IG corporate bond index closed at B+153.8bp (+0.5bp) and the HY index at B+483.8bp (+3bp). For iTraxx, Main was up a touch at 74.5bp and X-Over up at 315.5bp. The 10-year Bund yield edging lower to 53bp, while the 10-year Treasury was unchanged at 2.27%, leaving the spread at a new record high of 174bp.

We look for a decent session today, with the big move in US stocks (+1.5%) the main driving force. Have a good day.

16th November 2015

Fluctuat nec mergitur

MARKET CLOSE:
FTSE 100
6,118, -60
DAX
10,708, -74
S&P 500
2,023, -23
iTraxx Main
74bp, +1.5bp
iTraxx X-Over Index
310bp, +5bp
10 Yr Bund
0.56%
iBoxx Corp IG
B+152.8bp, +1bp 
iBoxx Corp HY Index
B+481bp, +5bp
10 Yr US T-Bond
2.27%

First things first. Our thoughts are with the victims, their families and the people of Paris after the tragic events which occurred at the end of last week. Life is too precious to be lost like this.

On to less important things…

Subliminal? No. Read my lips… The depressing read over the past few days around corporate earnings, the oil glut and drop in prices, inflation or rather the lack of it, global growth and US interest rates all make it sound as though we are sleepwalking into another financial disaster. We are not. All of the aforementioned can be explained away. And we are already used to a world where the higher levels of growth we had previously become accustomed to are not not going to return for a good while yet. So, seven years later, we are still stuck in the doldrums and we most likely will be writing the same “So, 10 years later….”. The situation is all playing into the hands of the corporate bond market. We’ve known and said as much for many years. It’s just that market forces – illiquidity, idiosyncratic risk and at times investor nervousness – have scrubbed out the straight-line tightening and constant positive performance. However, it is quite clear (to us) that everything is once again (or still) falling into the hands of the corporate bond investor. The economic outlook remains bleak, and there will be no return to high levels of sustainable growth. Interest rates are staying low or going lower everywhere – except perhaps in the US. They might eventually have to change course, and they have form in doing so. Corporate profits are falling, which might necessitate a closer look at equity valuations, but balance-sheet integrity is being maintained. And the default rate in Europe is very low and expected to remain so (less than 3% in 2016, we think), while the small increase in the US is nothing to get concerned about. With risk and high levels of volatility around equities, commodities and FX and continued low interest/deposit rates, institutional and retail demand for corporate bonds will stay firmly in place through 2016. It’s that simple.

A mixed bag from the US, but poor eurozone data keep expectations in place… In the US, Friday saw much weaker than expected producer prices (-0.4%), while the University of Michigan consumer sentiment survey was higher than forecast at 93.1. Retail sales grew last month, but again came in significantly lower than expectations. Plenty of fat for the Fed to chew on there. In the eurozone, we closed out with a weak GDP print in Germany, low wage growth levels in France (again) in Q3 and another painful contraction in GDP and output in Finland. Commodity prices remained under pressure and with the IEA reporting a growing oil glut, the lack of demand and continued heavy pumping of oil by the Saudis and others means that global deflationary pressures will persist. Plenty of fat for the ECB council to chew on too.

Friday’s deal flow augers well for this week… Deals from Thermo Fisher and UPS to close out last week are a good sign that we might get higher levels of deal flow this week. The mid/low triple-B rated Thermo Fisher did a slightly increased Eur425m at midswaps+127bp in a 5-year maturity, while UPS was in for a dual tranche funding. A 4-year floater at Euribor+43bp and a Eur700m, 10-year deal at midswaps+75bp were the order of the day for UPS as it raised a combined Eur1.2bn. The counter has the monthly total so far now up at around Eur12bn for non-financial IG issuance. It’s looking like we can double that total by the time November is out.

Demand is evident, but secondary doesn’t show it… The corporate bond market isn’t quite broken, but there is a disconnect between primary and secondary. It’s almost as if we have investors needing bonds and prepared to add in primary knowing – or feeling – that there is upside and that the herd mentality offers them comfort. We’re all in it together. In the meantime, the Street plays “pass the parcel” in secondary, in a throwback to the 80s and 90s, when they could make a market and offer liquidity, and spread moves made sense. Investors are nervous about getting involved via this route… just in case they get it wrong. Someone isn’t smelling the coffee. Anyway, in the month so far, spreads have barely changed, as suggested by the indices. The Markit iBoxx IG corporate index closed last week at B+152.8bp (+1 on Friday), while the HY index was higher at B+481bp. And all the while, primary is going great guns, issues are being decently oversubscribed and new issue premiums rammed tighter. The iTraxx indices moved higher – as one would expect, given where equities were – with Main at 74bp (+1.5bp) and X-Over 5bp wider at 310bp. US stocks closed over 1% lower. The 10-year Treasury yield dropped to 2.27% and the equivalent Bund yield to 0.56%, but more revealing, the 2-year Bund yield was at a record low of 0.38%. Corporate bonds, gotta love ’em. Be confident, credit works.

13th November 2015

Credit and its predatory instincts

MARKET CLOSE:
FTSE 100
6,179, -119
DAX
10,783, -125
S&P 500
2,046, -29
iTraxx Main
73bp, +1bp
iTraxx X-Over Index
306bp, +5bp
10 Yr Bund
0.61%
iBoxx Corp IG
B+151.7bp, +1bp 
iBoxx Corp HY Index
B+475.6bp, +1bp
10 Yr US T-Bond
2.30%

Holding patterns rarely welcome… One never welcomes being trapped in a holding pattern, but that is exactly what has happened this week in the markets. Equities have played out in a smallish range (+/-2%), government bond yields have had small ups and downs after more dramatic moves the previous week and corporate bond spreads have barely moved. That is not what we would have envisaged after the strong non-farm payroll number a week ago. And the UST/Bund spread has hit at a record 172bp, as we suggested it would. Issuance has underwhelmed too. Single-name newsflow has been light and mainly centred on poorer earnings, while the big story this autumn around Volkswagen has taken the customary course of titbits of additional revelations around the emissions scandal. Macro has always suggested that China will be a big factor in how we play out 2016 – without mentioning the rest of 2015 – and the data is suggesting that next year will be a difficult one for the global economy. The OECD said as much, after all! We are probably clutching at straws, but with Thanksgiving just a couple of weeks away, we can hope that we might see some greater activity into the traditional US November holiday. All things being told, the aforementioned apathy-like mood in the market has been with us a while, and we would not be surprised (unfortunately) to see it persist into year-end.

Newsflow picks up, but it’s mostly poor… Eurozone industrial production for September came in at a lower than expected -0.3%. We had a raft of earnings which missed and a couple of UK-based industrial giants warning on full-year earnings, those being BAe and Rolls Royce. Whatever the reason – Chinese slowdown most likely – commodities took a battering, with the likes of Glencore and BHP stocks down around 10%. Oil (Brent) dipped below $45 per barrel and WTI was under $42 as the oil glut showed no signs of abating. Draghi was on the tapes in as dovish a mood as ever, as he offered everything but gave nothing. Things are neatly falling into place – once again – for corporate bond investors for 2016, and we will discuss this as a theme on Monday.

That left credit in a world of its own, again… We had deals! Continental did a short-maturity 3.5-year at midswaps+55bp and raised Eur500m, while the UK’s Vodafone lifted Eur750m of 5-year funding at midswaps+70bp. Both deals were around 4x oversubscribed, and pricing on both rammed tighter. They were also trading 4bp or so tighter on the break, while the short WPP and AutoRoute from the other day were also performing;  the 7yr BMW from yesterday was 7bp wider. Anyway, the issues took the running total for the month to around Eur10.5bn. Other deals came in the financials sector, while German real estate group Alstria is likely due on Friday.

Rock-solid corporates except special cases… Interest rate concerns (in the US) and poorer economic data (elsewhere) kept equities in the red for most of the session. Dudley and Bullard, a couple of the Fed governors, were in hawkish mood (let’s hope they get on with it, so we can get on with it too), and that saw to it that the S&P would be under pressure, eventually closing out -1.4%. European equities closed up to 2% lower. Treasuries got a bid behind them, as did eurozone government bonds, with the 10-year UST yield dropping a little to 2.30% and the Bund yield lower at 0.61%. In corporate bonds, owning Glencore paper is becoming a real pain. For instance, the 21s were down 4.5 points in cash price at Eur76, or Z+610bp! Otherwise we were fairly firm, aside from those raw materials and oil names, and better across most other sectors and capital structures. The firmer tone in the cash market wasn’t reflected in the cash index, however, with the Markit iBoxx IG corporate index closing at B+151.7bp (+1bp) and the HY index at B+476bp (also +1bp). Main and X-Over were better bid (higher) into those weaker equities with the former at 73bp and the latter closing at 306bp.

It could be a difficult Friday. Have a restful weekend. Back Monday.

12th November 2015

Thanksgiving the next marker

MARKET CLOSE:
FTSE 100
6,297, +22
DAX
10.908, +75
S&P 500
2,075, -7
iTraxx Main
70.5bp, -1.5bp
iTraxx X-Over Index
296bp, -6bp
10 Yr Bund
0.61%
iBoxx Corp IG
B+151bp, unch 
iBoxx Corp HY Index
B+474.8bp, +1.5p
10 Yr US T-Bond
2.33%

Time to reflect… Armistice Day in Europe and the Veterans Day holiday in the US saw to it that the session was limited in just about every way. We are however almost halfway through the month, and it is worth reflecting on where we stand in terms of performance and supply and what we might look forward to for the next few weeks. Performance matters most, and we see that IG corporate bonds as measured by the Markit iBoxx index are down -0.6% YTD in total return terms, with spreads 40bp wider. For HY it is a better picture, with returns a positive 2.75% but spreads 38bp weaker YTD. The shorter duration nature of the HY market has clearly helped prop up returns, while support has come from the rally in the front end of the curve. In IG, pressure on spreads generally from the likes of the VW and Glencore fallout and a fairly whippy but steepening back end of the government bond curve has seen performance under pressure. Corporate bond markets experienced some outflows in those darker days of August and September, but on the whole they have been light. Unfortunately, such has been the development of the market over the past six or seven years that secondary market liquidity is now so poor that the impact of any selling pressure seems to have a severe and wholly disproportionate impact on valuations. We are confident that spreads will recover, and we look for the iBoxx index to be in the high B+130bp area by year-end (B+151bp now) while we think the HY market could see B+450bp (B+473bp now). For the latter, this is not a tall order given that we do not expect too much issuance between now and then; for IG, it might well depend on how much supply materialises. Another Eur10-15bn this month would be acceptable (with Eur9bn MTD).

US bond market closed… Veterans Day saw the US Treasury bond market closed. Equity markets were open and moved higher amid reduced activity, while at the same time digesting the news of another weak data point from China. This time, industrial production saw a slower than expected 5.6% rise on October and was the weakest print in several months. With a slew of poor economic signals emerging from China, more stimulus is just a matter of time. And that is keeping the markets generally from heading significantly lower. On Wednesday, European equity bourses were 0.5-0.8% higher and the S&P was flattish. With the Treasury market closed and the 10-year Bund yield lower at 61bp, the differential with its Treasury counterpart was at a fresh, record high of 172bp. The 2-year bund yield was at a record low yield of -0.37%. In corporate bonds, a lacklustre session left the market pretty much unchanged. The Market iBoxx IG corporate index was at B+151bp, the HY index up a touch at B+475bp while in the synthetics, Main and X-Over outperformed cash and were at 70.5bp and 296bp, respectively.

Finally, Macy’s the US department store operator, saw its stock take a pummelling after it warned on sales and profits. This bodes ill for other department stores reporting Thursday and Friday and might act to limit any material upside. And oil was lower with WTI at $43 again. With all that here’s hoping for a slew of new supply to keep us all busy today. Have a good day.

11th November 2015

It’s the data, stupid

MARKET CLOSE:
FTSE 100
6,275, -20
DAX
10,833, +17
S&P 500
2,082, +3
iTraxx Main
72.5bp, +1bp
iTraxx X-Over Index
303bp, +4bp
10 Yr Bund
0.62%
iBoxx Corp IG
B+151bp, +1bp 
iBoxx Corp HY Index
B+473bp, +5bp
10 Yr US T-Bond
2.33%

The Fed will look after number one… It might all be about the data, but they are itching to pull the trigger – and they will in December. Concerns are mainly from the numbers emerging from China, but the US story isn’t really set in stone either as far as sustainable recovery is concerned, and the eurozone continues to meet all our dire expectations. For instance, China came to the fore again in Tuesday’s session, with consumer price inflation rising more slowly than expected in October as deflationary forces took hold. That kept stocks lower and the broader market in risk-off mode. Attention was also on the US and the increasing likelihood of a rate rise, which boosted the dollar while the euro weakened on what has now become the most favoured (and watered down) route for further ECB easing – a deposit rate cut ($1.06/euro). Even though a Fed rate hike might do much of Draghi’s heavy lifting (in weakening the euro), the market will be disappointed if the ECB fails to deliver something. The much-anticipated asset purchase programme changes might not come until some time in late Q1, as the laboriously frustrating piecemeal response the ECB has so far employed in this 7-year long crisis likely continues. As for credit, all the aforementioned situations were not enough to dent in any way the positive feeling in the corporate bond market, which is quite strong at the moment. We had a plethora of new deals, single-name event risk was absent, poor secondary market liquidity worked in favour of the bullish tones and all contrived to help spreads manage a little movement.

Eur9bn is up… With today’s four IG non-financial deals, the total month-to-date for issuance has reached the Eur9bn mark. We are looking for November to be a Eur20bn month, and the current run rate suggests we’ll get there. Today we had WPP, Amadeus, BMW and APRR. WPP was well received for a Eur600m 4-year deal at midswaps+65bp, which garnered a Eur3bn book. Amadeus likewise managed a huge book of almost Eur5bn for its 6-year transaction priced at midswaps+135bp, while Autoroutes Paris was back for floating paper in a 4-year maturity at Euribor+70bp (3x covered book). BMW was also back with a Eur1.25bn 5-year at midswaps+63bp. Covered bond and SSA deals made up the rest in what was actually a fairly active session in primary.

Secondary a touch wider, but noise… In the big scheme of things little really happened while it seemed that corporate credit managed to move a touch weaker for choice. It shows that our market is fairly resilient to the macro headline newsflow finally; and that any moderate weakness in stocks is not seeing much by way of selling pressure in corporate bonds. We are going tighter from here into year end. That said, the Markit iBoxx IG corporate bond index closed at B+151bp (+1bp) and the HY index was up at B+473bp (+5bp). This really does look like more defensive marks by the Street into any weakness in equities, and there is absolutely nothing by way of pressure to exit positions. This will be the same story through 2016, driven-on by that huge uncertainty around macro. That’s a topic for another day. iTraxx Main closed up at 72bp and X-Over at 303bp. The US closed a touch better, while the 10-year UST/Bund spread was at a record 171bp. We suggested 200bp in our note a couple of days ago….

Have a super day.

10th November 2015

Moody blues

MARKET CLOSE:
FTSE 100
6,295, -59
DAX
10,815, -173
S&P 500
2,079, -21
iTraxx Main
72.5bp, +1bp
iTraxx X-Over Index
301bp, +5bp
10 Yr Bund
0.66%
iBoxx Corp IG
B+150bp, unch 
iBoxx Corp HY Index
B+464.5bp, -4bp
10 Yr US T-Bond
2.34%

Primary provides the interest… New deals kept the corporate bond market focused in an otherwise limited session activity-wise. There was plenty of news to chew on, though. Some attention was on the Financial Stability Board (FSB)’s release of the Total Loss Absorbing Capacity (TLAC) impact study on “too big too fail” banks, suggesting they need to raise up to $1.1trn in debt – under the worst case scenario – by 2022 (or 2028 for EM banks). It wasn’t big news for developed market banks, with most suggesting they will meet the requirements comfortably. We had the OECD’s latest report on global growth, in which the organisation reduced its global growth forecast for 2015 to 2.9% versus expectations of 3.6% just a couple of months ago. Quelle surprise! Brazil’s outlook was particularly bleak (debt up, currency weaker, inflation higher) – and they added Russia and other oil-producing nations to that, while China looks like it is heading for a major readjustment phase, with fixed asset investment and industrial output on the wane. And the Fed wants to raise rates! 2016 is going to be a very challenging year. The ECB increased the upper limit of individual bond issues that it can buy from 25% to 33% in a sign of giving itself some flexibility, no doubt with which to manipulate the market further. New deals came from Sky, Simon Properties and a HoldCo transaction from UBS.

Deals keep the market ticking over… Sky Plc (Baa2/BBB) lifted Eur500m in a barely 2x oversubscribed deal at midswaps+130bp in 10-year, and Simon International Finance (A2/A) – a US real estate investment trust – made a rare visit with a Eur750m issue at midswaps+90bp in a 7-year deal (around 2x oversubscribed). The new issue premiums were around 15bp for the former and 5-10bp for the latter. Notice that the oversubscription levels were lower than the deals last week. We would think the Sky deal was a little too long for a triple-B communications company, while the Simon deal was too rich for a relatively unknown borrower, even though it does have a good rating. FCA (a Fiat company financing arm) closed us out with a Eur500m, 2.5-year maturity issue . For the banks, UBS printed a Eur1.25bn holding company (intended TLAC compliant) deal at B+165.4bp.

Secondary credit better in the face of lower equities… The OECD’s lower global growth prediction and the weak trade data from China over the weekend put a dampener on stocks, and this in turn had an impact on the secondary corporate bond markets. Mondays are usually fairly limited in terms of activity anyway. European stocks were down 1.5% across the board, with the drop accelerating as the US markets moved down (S&P -1%). Single-name newsflow saw Fitch downgrade VW to BBB+ and, in line with Moody’s and S&P, retaining a negative outlook. Better late than never. They suggested the fallout could be substantial. Really? the action left us all underwhelmed. There will be more downgrades for the beleaguered group and a junk rating is more likely than not; it’s just a matter of time. The Markit iBoxx IG corporate index was a smidgeon better at B+150bp with the only obvious weakness coming from CoCos. HY was better generally too and this was shown in the Markit iBoxx HY index which closed lower at B+464.5bp (-4bp). Credit’s recovery after the August/September ructions ought to continue through to year-end. The iTraxx indices followed stocks though (weaker) and underperformed cash. Main was up at 72.5bp and X-Over at 301bp.

Have a good day, won’t you…

9th November 2015

Credit cycle.. What credit cycle?

MARKET CLOSE:
FTSE 100
6,354, -11
DAX
10,988, +100
S&P 500
2,099, -1
iTraxx Main
71bp
iTraxx X-Over Index
294bp
10 Yr Bund
0.69%
iBoxx Corp IG
B+150.3bp, -1.2bp 
iBoxx Corp HY Index
B+464.5bp, -4bp
10 Yr US T-Bond
2.33%

Credit cycle no more…  The differing rate outlooks are being interpreted as telling us that the credit cycle is no longer co-ordinated between regions. The assumption here is that there is a credit cycle at all. Higher rates/tighter policy likely in the US, lower rates/looser policy possibly coming in the eurozone and China/Asia steered the same way as the latter suggests a breakdown in the global linkage of the “cycle”. There may still be the vestiges of one in the US, but we would argue that the credit cycle as we have always known it is broken, as we continue to try and make sense of the global economy. We are in uncharted waters. That’s what the central banks’ manipulation of markets through massive monetary easing has brought us. To save the world from collapse, we had concerted and unprecedented loose policy as the central banks kept the global economy afloat and prevented a catastrophic financial collapse. That started 7 years ago. The politicians have failed in their duty since then (lack of real structural reform). Anyway, we have the prospect of a rate hike in the US in December and a possible cut in the eurozone (or something else) around the same time. The traditional view that the European economy follows the trajectory of the US one – but with a 6-9 month delay – no longer holds, we believe.

Euro-denominated credit should beat dollar risk… That means higher underlying yields in the US will eat away at total returns in corporate bonds, whilst lower yields here will help support returns. On the other hand, if the economy is improving in the US (and it is sustainable), then that ought to help spreads tighten more than they might in the eurozone (on the back of improving credit metrics). That is, benchmark funds in the US should outperform euro-denominated ones. So far, classical relative value dynamics between the two asset classes. Sterling corporate bonds fit somewhere in between. However, the additional toggle factor comes from demand. Lower yields in the eurozone (ECB buying more government bonds and/or increasing the scope of the buying programme to corporate bonds) will just bring greater demand for corporate debt. So spreads will tighten, as there will in no way be enough supply. That will help benchmark players. As an aside, the tighter the spreads and the lower the yield the more violent the volatility and market swings – this is a given! There might also be greater M&A in the US (although it looks like it may have topped out) if CEOs believe they have turned the corner, which is another reason to broadly stay steered towards euro-denominated corporate bonds. As for Asian/EM assets, there has been and will be further fallout on higher US rates. Generally we would stay away, but we recognise that some of the bigger blue-chip like companies based in the emerging markets will offer good value and opportunities. Do your credit work, but be prepared for some mark-to-market losses.

Whopping payrolls sets course for a hike in December… So US Treasury yields jumped higher and dragged eurozone government bonds with them, though by less. We still have much resistance to higher yields. The difference between the 10-year Treasury/Bund rose too, to a record high of 167bp, before settling back at 164bp. Recall, we suggested 200bp is a real possibility. Friday’s response to the huge payroll number was initially euphoric: the prospect for higher rates was ignored and equities chose to believe instead that growth was more important and that the US will help lift the global economy from its quagmire. Into the rest of that session and over the weekend, it was about how the Fed will control the pace of subsequent increases. US stocks closed flat on Friday, European stocks were higher with the DAX taking the lead and corporate credit ended the session tighter. We had a new deal from Sanef (10-year, Eur600m), with the supply total limping over the Eur4bn MTD level. The Markit iBoxx IG corporate bond index was lower at 150.3bp while the HY index managed 4bp of tightening to B+465bp. Main and X-Over were little moved, up slightly at 71bp and 294bp respectively.

So what does it all mean?… We think equities may have had their big moves for this year. They will be left in a range not too far from where they reside right now. Small ups and downs – meaning +/-2% like moves intraday (their new normal where we don’t flinch); but there is little to halt the better bid and overall solid demand for corporate bonds. We would prefer euro-denominated corporate bonds versus dollars and we would continue to take on a higher-beta risk positioning bias. When the market settles (and it will), we will see Treasury/Bund yields diverge some more. Corporate bonds in euros will be looking cheap – again. The change might come, one day, but that will depend on when we see some stability and recovery in the macro situation. Alas, when the credit cycle returns…

Chinese imports fell 18.8% yoy in October and exports declined almost 7%, figures realised on Sunday showed. For September, these were 20.4% and 3.7% respectively. Euro area GDP numbers for Q3 are this week, and we have US retail sales and the Michigan consumer sentiment survey to look forward to. Have a good week.

6th November 2015

UST-Bund 10 year spread… heading for 200bp

MARKET CLOSE:
FTSE 100
6,365, -48
DAX
10,888, +43
S&P 500
2,100, -2
iTraxx Main
71bp, unch
iTraxx X-Over Index
291bp, unch
10 Yr Bund
0.61%
iBoxx Corp IG
B+151.5bp, -0.3bp 
iBoxx Corp HY Index
B+468.4bp, -0.5bp
10 Yr US T-Bond
2.25%

UST/Bund spread or new issuance levels – where to?… Let’s look at both. The spread between the 10-year Treasury and the 10-year Bund is around 162bp and just a shade off its 166bp all-time high. Yellen’s bullish tone on Wednesday suggests that a December rate hike is almost certainly coming, and the US yield curve will adjust accordingly. It will probably bull-flatten, but the back end will rise some too. On the other hand, today’s fall in German factory orders for September illustrates that the eurozone economy remains mired in ‘recession’, and the mixed data from the eurozone totally justifies the ECB’s stance that further easing is more likely than not. The BoE’s dovish tone on Thursday attested to difficulties in Europe – and indeed the global economy. That additional ECB easing might not come in December given Draghi’s more cautious tone earlier this week, but most observers are of the view that further QE is coming. That means current yields in the eurozone ought to be anchored: the front end is, but we look for some movement lower in the back end. We might not get down to the low teens for the 10-year Bund yield like we did in Q1, but we don’t need that to position for a 200bp UST-Bund spread over the next quarter or two. It is quite possible that is where we are heading. We will discuss our view on the implications for corporate credit from these differing rate cycles in Monday’s daily.

Supply threatens to underwhelm… As for issuance, the month so far has delivered Eur3bn and the YTD level of non-financial IG corporate issuance is at Eur236bn (Eur259bn in 2014), according to data supplied by Dealogic. November can be a very heavy month. For instance, in 2014 non-financial supply hit a fantastic Eur41bn (Dealogic data), but 2011 0nly offered us Eur9bn. We have suggested that Eur20bn or a little more is quite possible. Unfortunately, the current macro uncertainties, jitters around higher rates and the subsequent market volatility are acting as disruptive forces in terms of allowing sustained investor (and issuer) confidence to persist. For better consistency in issuance over a longer period, the tea leaves need to be perfectly aligned. As for the HY market, that will only reopen properly once investors and issuers have become comfortable with the IG one. The HY market has printed just Eur2.7bn of deals, from 10 issues, since the beginning of August, and the YTD total is Eur46.5bn (source: Dealogic). Eur50bn by year-end is going to be tough ask at this rate, especially compared to the Eur57bn record issuance in 2014. On Thursday, RCI Banque was the sole corporate deal, with a Eur500m no grow at midswaps+113bp on a book 6x covered.

Equities soothed by the dovish undertones… Looser policy for longer means risk assets stay afloat. That helped keep most European equity indices in the black. Those followers of the trend, namely the iTraxx indices, managed to move very little in tandem with stocks, while cash corporate credit remained steady to perhaps very slightly weaker. Perhaps that is just a healthy reaction after much tightening. We will need more than what we have at the moment to derail the overall strength in the cash market. After all, year-end beckons and money needs to be invested. Elsewhere, UK car sales fell in October for the first time in over 3 years, while reports showed that the emissions scandal was beginning to have an impact on VW sales in the big European markets. US earnings were mostly misses today and there was some pressure on the S&P/Dow as a result, but this failed failed to elicit much of a follow-through into European closes. VW paper was mostly unchanged to perhaps 2-3bp wider in senior (after 30-40bp of weakness on Wednesday) while the new RCI deal was a basis point tighter versus reoffer at the close. The new Barclays T2 from Wednesday was 7-8bp tighter,

The Markit iBoxx IG corporate bond index closed pretty much unchanged at B+151.3bp and the HY index also unchanged at B+468bp. iTraxx Series 24 Main was at 71bp and X-Over at 291bp.

Happy Friday and have a good weekend. Back Monday.

5th November 2015

Bonfire day – check it out

MARKET CLOSE:
FTSE 100
6,413, +13
DAX
10,845, -106
S&P 500
2,102, -7
iTraxx Main
70.5bp, +0.5bp
iTraxx X-Over Index
292bp, -3bp
10 Yr Bund
0.6%
iBoxx Corp IG
B+151.8bp, -1bp 
iBoxx Corp HY Index
B+469bp, -7bp
10 Yr US T-Bond
2.23%

Little to chew on ahead of non-farms… There were a few new issues, secondary offered its usual little titbits and we had VW debt and equity prices under severe pressure again. The excuse for the rather apathetic mood was the non-farm payroll report on Friday, as well as the various comments from Draghi (and Yellen) leaving the market scouring for clues as to whether the European central bank will ease further in December. This game of ‘will they won’t they’ and the markets almost total obsession with it has become rather laborious. Grown men waiting for a sign. It’s going to come, if not in December, then in Q1 or Q2 of 2016, so let’s get on with the business of investing. That’s referring to additional QE from the ECB and a rate hike from the Fed! The euro fell against the dollar (to $1.08), oil futures fell 3% and US Treasury yields rose. Eurozone PMIs were ‘ok’ showing moderate expansion while the slew of corporate earnings continued with results fairly mixed. Shipping line group AP Moeller announced capacity and job cuts and Glencore announced how it was going to lop $5bn off its debt load (to $25bn) by year-end.

VW story threatening to turn into a tragedy… Few will really wish a corporate giant, as important as Volkswagen, to fall from grace as spectacularly as it is. There could be worse to come. The emissions scandal in effect is a form of corruption, but, where the populations health and climate science are concerned, the politicians and the regulatory authorities are going to want a make an example of them. They will extract their pound of flesh and we really have no idea where this will end. First diesel engines and now potentially CO2 emissions being fiddled and taking in petrol engines. Well, it has gone from very bad to very, very bad. The dire situation saw the company’s stock fall almost 10% and its debt prices tumble in Wednesday’s session. At the worst point, the long-end in senior gapped 40bp, its 5-year CDS was up at around 220bp and the VW subordinated hybrids lost up to 4-points. Into the close, some recovery saw default protection 20bp wider at 200bp, seniors left at 30-35bp wider and the hybrids around 2-points lower. The numbers being touted around in terms of fines and the like are at a level that will severely impair the group’s financial flexibility for years to come. We don’t think the scandal threatens the very existence of the company, but a junk bond rating must beckon soon enough. Prices have further to fall, that is. After Wednesday’s close, Moody’s downgraded VW’s debt rating to A3 from A2 and left the outlook as negative. That’s the same as S&P, but they have the rating on review for further downgrade.

Primary lighter than expected… There were many new deals, but only one non-financial corporate in the form of an unexciting low beta issue from Nestle. They printed a Eur500m no grow, long 7-year at midswaps+25bp, taking the monthly run rate up to around the Eur3bn mark. The rest was covereds, a small T2 insurance deal from RLMI and a couple of short-dated senior bank deals. Thursday’s session offers the hope of a final flutter before Friday’s NFP print which usually means no deals on that day. Barclays’ T2 holding company bond also got off the ground (the first of its kind in euros, at midswaps+245bp) and was tighter on the break.

The rest was business as usual… The Dax was in the red while most other bourses recorded gains small gains. Yellen suggesting a rate hike in December was more likely than not put a dampener on stocks into the US close. In Europe, the synthetics – iTraxx indices – were better offered (lower) into those earlier better stocks but ended a touch wider, while cash secondary credit was again a little tighter with VW being the main exception. Secondary markets aren’t very exciting these days given the risk-on complex and low Street inventory levels, so volumes are low and we get a steady grind better that should be with us through to year-end. IG corporates ended 1-2bp better in the day and HY of the same order if not a touch better even. Financials closed unchanged and overall, cash outperformed CDS on the day. Apart from VW, there was little by way of individual stories to get our teeth into. Small mercies. That all left the Markit iBoxx IG index a basis point lower at B+151.8bp and the HY index at B+469bp (-7bp). Yellen’s bullish rhetoric and late weakness in stocks saw to it that iTraxx Main was up a 70.5bp (+0.5bp) and X-Over at 292bp (-3bp).

That seems like a busy day, it wasn’t. Happy Thursday.

4th November 2015

Show me the premium!

MARKET CLOSE:
FTSE 100
6,384, +22
DAX
10,951, unch
S&P 500
2,111, +7
iTraxx Main
70bp, -1bp
iTraxx X-Over Index
295bp, -3bp
10 Yr Bund
0.57%
iBoxx Corp IG
B+152.8bp, -1.2bp 
iBoxx Corp HY Index
B+476.8bp, -6.5bp
10 Yr US T-Bond
2.22%

QE is working, really?… It does, if it is about lowering yields, helping banks and large corporates refinance at lower cost, keeping the corporate and consumer default rate at bay and keeping the economy ticking over while the politicians dither about enacting longer term structural reform. But it hasn’t really done the job in promoting sustainable growth and helping inflation push higher, nor in reducing corporate and consumer indebtedness. It has merely pushed on that string. The ECB paper out Tuesday couldn’t really say anything too different than it did. QE, and various forms of it, was the only remaining option central banks had open to them to keep the global economy from falling into depression (it still might). Reducing deposit rates further, deeper into negative territory in the case of the ECB and the Swiss, will not work. For the consumer, the mattress beckons. For corporates, hoarding cash like everyday was a potential new crisis point, they will pay up for parking their cash in the banking system. They are already and a few more basis points will not make much difference. So expect some action from the ECB in December, if not it will come in Q1. The Fed and the ECB can diverge policy and the market is already suggesting that to be the case with the 10-year Treasury/Bund spread back at close to the highs (165bp now). We are not in any way jolly about the recovery potential. Lower or anchored yields means safe, higher yielding (more than government bonds) assets and low volatility dynamics will keep investors married to their corporate bond positions. The long term solution? Pain. That is, the world needs cold turkey treatment. Nobody is prepared to administer it.

New issue premium vanishes in double quick time… If you see the herd coming, it’s usually too late. The new issue premium for deals just about vanished today. Through September and to the beginning of last week, issuers stepped back for fear of being ridiculed for being desperate. Investors were too scared to take on much risk in case they got it wrong. In the space of 3-4 sessions, it’s risk on, there’s a scramble for paper and risk premiums have vanished. Assuming of course, that today’s sole IG non-financial deal, from Italian utility SNAM is anything to go by. An 8x oversubscribed book, saw the initial new issue premium of 18-23bp wiped out for the Eur750m deal as the final price of midswaps+77bp attested to. We are not shocked by it. We think this will be the case going forward now unless some event sparks a risk-off moment, or period, again. Other than that, there was the usual covered bond issuance, we had a green SSA deal and Barclays was out with T2 funding.

Secondary spread market bias still supportive… That was despite European stocks spending most of the session in the red only to close pretty much unchanged, while the US earnings stream today was mixed with more downside than up (S&P up 7 points). Automakers’ quarterly earnings were good (Chrysler, Ford, BMW) while most of the reporting banks missed and announced deep job cuts – again. VW was back in the news on Monday night with emission tests possibly impacting its Porsche brand, but initial hybrid bond weakness at the open on Tuesday was mostly reversed as the session progressed, down in the end by around 0.75 points. Low beta risk was unchanged to a basis better for choice, while higher beta paper was up to 3-4bp tighter, with clear investor willingness to add. The tightening trend was at around the same level in the financials sector across senior and subordinated debt. Overall, we closed out with the Markit iBoxx IG corporate bond index at B+153bp and the HY index 6.5bp tighter at B+477bp. In iTraxx, S24 Main was a basis point tighter at 70bp and X-Over 3bp lower at 295bp.

Happy Wednesday.