Suki Mann

Author Archives: Suki Mann

9th October 2015

Pure Shakespeare

MARKET CLOSE:
FTSE 100
6,375, +38
DAX
9,993, +23
S&P 500
2,013, +18
iTraxx Main
83bp, unch
iTraxx X-Over Index
341bp, +1bp
10 Yr Bund
0.58%
iBoxx Corp IG
B+162.1bp, -0.3bp 
iBoxx Corp HY Index
B+514.6bp, -2bp
10 Yr US T-Bond
2.11%

Idiosyncratic situations need not derail the credit market… The corporate bond market has had a torrid time of late, but we have pulled back some performance, with positive returns this week on the back of a good rally in spreads. There have been no new calamitous headlines (Deutsche Bank’s Eur6bn+ expected 3rd quarter loss is bad, but not life-threatening), the poor news flow around Volkswagen has been more contained, Glencore has been whippy (in stocks and bonds) but generally better, and the lack of primary activity into overall higher equities has seen sentiment for credit on an improving trend. Offered-side liquidity has been lacking, and so the aggressive and low volume-driven spread weakness through September has seen some decent recovery. That is, we are of the view that there is always an exaggerated move wider in times of so-called ‘stress’, but that disproportionality is somewhat corrected on any recovery. Why? Poor secondary market liquidity in both legs of the trade. Trying to lift paper on Wednesday or Thursday this week, for example, was nigh on impossible at reasonable levels (especially in the beaten up names), with the Street reluctant to go short or lose inventory into a more positive period for the corporate bond market.

Market overall remains cautious, but wants to be constructive… Idiosyncratic events have a habit of fading quickly from the memory. The three aforementioned might be added to, they might not. But there is little one can do in terms of positioning for such events, other than to reduce risk generally and take a less aggressive stance (perhaps move from a benchmark overweight to neutral, or neutral to underweight). We suspect that sort of positioning trade has been in place for a while, cash positions have been built up and any prolonged period of stability (or cheap deals) will see money put back to work.

Mixed into the end of the week… Primary has been light all week, with just Eur1.3bn issued so far since the beginning of the month, in IG non-financials. The DB news was brushed aside as its stock dropped almost 4% but managed to recover much of the loss, and its senior bonds were marked wider only to close flat. The group’s CoCos took a hit on concern they could be written down or converted to equity on any major capital shortfall. DB does have form in disappointing investors. Recall, a few years ago it was one of the first (and still few) major, blue-chip banks to not call an institutionally placed callable LT2 debt issue – when it had the means to do so. The market has a short memory only when it suits! The argument that it would be self-defeating if it did, given that it will possibly need to issue more of this product in the future, won’t wash with too many who will choose to shoot first and ask questions later.

All’s well that ends well… Not quite how the great Bard intended its use, but the proverb seems relevant for the summing up of this week. The new event was Deutsche, while the plunge in German exports just adds to the overall macro gloom. The need to keep policy accommodative in Europe is set in stone for a good while yet (the BoE will be doing the same, despite protestations to the contrary from some quarters), and this will feed back into the corporate bond market through recreating a supportive bid for this risk product. Anyway, we closed out Thursday with spreads generally slightly better. Limited offer-side liquidity helped higher beta valuations, with good tightening in Anglo American paper, little happening around Glencore and VW a touch weaker for choice. CoCos were a tad lower (cash price), as were hybrids. In primary, French telecom tower operator TDF Infra printed a Eur600m inaugural deal off a Eur1.7bn book to take the MTD new issue supply limping past the Eur1bn mark (from just three deals) – and Eur15bn the October average over the past few years (source: Dealogic) looking difficult to match. In HY, Russia’s Gazprom pulled in Eur1bn in 3-year funding costing 4.625%, some 40bp tighter than IPT. Demand for corporate bonds, oh yes.

Finally, the iBoxx IG corporate bond index was at B+162.1bp (-0.3bp), while the HY index was lower at B+514.6bp (-2bp). For the synthetics, iTraxx Main and X-Over closed unchanged from the previous session, at 83bp and 341bp respectively. We should have decent session today given the minutes of the FED meeting overnight making it unlikely they move on rates in October. Stocks in the US took a leg higher on the news with the S&P back up through the 2,000 level, ensuring a good close for the week in most other risk asset classes.

And that’s it for this week: remember to vote in the latest poll, have a good Friday and a restful weekend. Back Monday.

8th October 2015

Grinding

MARKET CLOSE:
FTSE 100
6,336, +10
DAX
9,970, +68
S&P 500
1,996, +16
iTraxx Main
83bp, -1.5bp
iTraxx X-Over Index
340bp, -3bp
10 Yr Bund
0.59
iBoxx Corp IG
B+162.4bp, -3.4bp 
iBoxx Corp HY Index
B+516.6bp, -9bp
10 Yr US T-Bond
2.07%

Primary struggles to get going… October usually averages around Eur15bn in IG non-financial corporate supply, according to data compiled by Dealogic, but we’re unlikely going to get anywhere near that unless some of the current headwinds subside quickly. This month so far has seen just two offerings, totalling Eur700m, illustrating the cautious nature of issuers and perhaps investors, but also the difficult market conditions (volatility, event risk, macro outlook). In a head-scratching sense, despite all the morbid-like headlines, the demand for paper is actually there, but the price to get a new deal away might be too much for some borrowers. That is, deals which come will need to have good premiums (IPTs anyway) – too embarrassingly high, we suspect, for some of the more distinguished/frequent/bluechip borrowers. And no one will want a deal that doesn’t work, while few will want to be seen as being needy of funding – desperate, in other words. Anyway, that can change very quickly and despite another better and quite strong risk-on session today, there was only Deutsche Bahn on the screens with a non-benchmark print. In all, this lower level of issuance is already starting to act as a driver for some performance in secondary, and we need that given the tumultuous period of weakness through September. For HY, the period since May has been very difficult, with very low levels of issuance, and while we are at Eur45bn YTD, getting close to Eur50bn might prove to be a tough ask.

Euro denominated monthly issuance 2015 (Dealogic data)

Illiquid markets helping market gap tighter… It was going so well, with stocks smartly higher and credit much tighter. It felt like Q1 all over again. With no primary to hinder secondary levels, everything was marked better and lack of dealer inventory or just dealers not wanting to let inventory go saw spreads ratchet tighter. This strong session for spread product has come much quicker than we envisaged. Demand for risk was back and suddenly it felt like credit was worth its weight in gold again. Corporate hybrids caught a good bid into it, with prices up a point or more – including VW, which was actually the outperformer. Most other paper rallied into it, while some of the laggards included the likes of Renault and Ford paper. All that might be short-lived, however, given that European equities finished only a touch higher into the close after being up over 1% for much of the session.

Omens looking good but we need to sustain it… Equities always play a large part in terms of sustaining confidence for all risk assets and so it’s important they can hold firm or rise. For the most part in Europe today they did and while US stocks were choppy, they managed to close up (S&P +0.8%). Using the broad measure for corporate bond valuations, the iBoxx index, the IG corporate credit index closed at B+162.4bp, or -10bp from the two-year high we saw only a week ago and 4bp in the session. That’s a healthy rally, with CoCos and corporate hybrids – the two higher-beta sectors – leading the charge better. And that’s despite there still being a sizeable BHP hybrid new issue in the works. In HY, the index was tighter by 9bp at B+516.9bp, or some 35bp tighter than the multi-year wides of last week.

On a housekeeping note, our latest anonymous poll asks our real money readers how they’re positioned for the final quarter. Vote now.

A Thursday in October, have a good day.

7th October 2015

Investor positioning poll

Our latest anonymous poll is attempting to ascertain how bullish or bearish investors might be into this final quarter of the year. We are faced with many headwinds and may have reached a pivotal moment for this year. Preserve performance or chase it? How are you positioned?

This poll closes in:

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7th October 2015

Back to the future

MARKET CLOSE:
FTSE 100
6,326, +27
DAX
9,903, +88
S&P 500
1,980, -7
iTraxx Main
84.5bp, -4bp
iTraxx X-Over Index
343bp, -19bp
10 Yr Bund
0.59%
iBoxx Corp IG
B+165.8bp, -2.7bp 
iBoxx Corp HY Index
B+525.5bp, -12bp
10 Yr US T-Bond
2.03%

We’ve been here before… Again we have weak macro reports (German factory orders, IMF economic outlook) which are suggestive of low rates for longer, more ECB QE keeping government bond yields pegged (or lower) and equities quite possibly sustaining their moves higher – should the Fed not move later this month, which is increasingly becoming the more likely outcome. That means all should auger well for the corporate bond markets given that it offers yield, safety (yes, they do) and hopefully a decent return. We’re taking baby steps at the moment into that possibility with a slow albeit selective grind tighter, which on the face of it doesn’t look particularly convincing. Nor should it be, truth be told. After all, there is still major event risk lurking around VW (now cutting non-essential investment) and the Glencore story has much legs in it. These two situations have been a good wake-up call for our markets in the sense that in the former, this kind of single-name event risk was completely unforeseen and difficult to position for in a diverse portfolio. For the latter, it is quite the opposite given the slowing in macro leading to the commodity cycle’s downturn. This resulted in a serious a hit on one of the largest exposed players around being inevitable. The method in the madness is for one to do their single name credit work, but also to cut/reduce exposures with discipline when the signs are obvious and growing against a particular borrower or industry group.

Baby steps to recovery could be short lived… On an index level, we might be seeing a laborious grind better just now, but should Q4 macro reflect ongoing concerns – and no economic catastrophe, then the bid for corporate bonds will see a 1-1.5bp IG corporate index (iBoxx) daily tightening in spreads turn into something a little more resolute like 2-3bp movements per day. Confidence has a habit of returning very quickly in our market and it will translate down to higher-beta risk quickly. At close on B+166bp (high B+171bp) for the iBoxx corporate index, we would think recovering September’s losses over the next few weeks (30bp) should be the first target to aim for. The weakness was predicated on low volumes and VW/Glencore event risk. We look for markets to gain much of it back. For HY, we are at B+525bp, having seen a high B+551bp just a couple of sessions ago, and could be around B+475bp before too long. Of course, liquidity or rather the lack of it works both ways and we accept that the ratchet tighter could be more measured than was the widening.

If confidence recovers, expect the new issue sluice gates to open… That’s always on the cards and cheaply priced deals will come first. Follow through performance will see to it that more supply, if not too onerous, feeds into a better feel for the market overall and those tighter spreads. There might be some who sell into strength, but it will be short-lived. Overall, little has changed, except that long term, the lack of a credible alternative to the current zero interest rate policy to boost sustainable growth will offer more structural concerns for the corporate bond market. That’s more a worry for later into 2016; for now, corporate risk still curries much favour. I am an unashamed bull.

Secondary showing modest recovery… Tuesday was a day which saw steady tightening pretty much across the board apart from VW. Nothing too convincing but better – and we’ll take that. High and low beta risk was bid-up tentatively amid balanced flows, and the sentiment was much improved. We’re a fickle bunch! VW cash was wider on those aforementioned headlines by up to 25bp, with we had the likes of Glencore and Anglo closing better by 30-50bp. Despite the good recovery in valuations and its equity price, Glencore is still trading cash at around 80c on the dollar. The iBoxx index in IG corporates was tighter at B+166bp and the HY at B+525bp. For iTraxx, we were similarly better, with Main at 84.5bp (-4bp) and X-Over at 343bp (-19bp). The US closed a small down with the S&P at 1,980 (-7).

Have a good day.

6th October 2015

More of the same please, sir

MARKET CLOSE:
FTSE 100
6,299, +169
DAX
9,815, +262
S&P 500
1,987, +36
iTraxx Main
87bp, -4.5bp
iTraxx X-Over Index
350bp, -23bp
10 Yr Bund
0.56%
iBoxx Corp IG
B+168.7bp, -1.8bp 
iBoxx Corp HY Index
B+537bp, -10bp
10 Yr US T-Bond
2.05%

In need of inspiration… And it seems like the market is of a similar view. Bunds retreated with little drama, the periphery tightened a little and iTraxx was better offered (lower) into a generic risk-on day after Friday’s weakness. Volumes were slow, though it feels like we are just treading water until something blows (for good or for bad). We can make it more dramatic in the sense that we saw out a good session for everything except VW paper (especially its hybrids), and that firmness may have been helped in a small way by the boost from Spain’s upgrade at the end of last week (periphery bid better). For instance, LT2 paper especially was also better bid, and even EM credit managed a decent day. Single-name event risk finally has limited contagion effects – until the next event; the market is believing increasingly that the Fed will not raise rates; Glencore in asset disposal mode or ‘for sale’ was roundly cheered; and the weak service eurozone/UK PMIs were seen as a sign that the ECB would be pushed closer to extending its QE programme. The US ISM similarly disappointed. It’s been a while, but the glass was seen as being half full, with bad news good for some risk assets. For corporate bonds, there was no grab-fest but sentiment was better, helped in no small part by the 2.5-4% rise in equities. In a sense, we are still digesting the payrolls report, but it is akin to being in that hole (football parlance) before the next Fed meeting and the earnings season which kicks off on Thursday. So after several fairly heavy weeks, the credit markets were making hay of any recovery from what we can only call distressed valuations.

Headlines keep VW down… The headlines around VW made sure its bonds continued to underperform, while Glencore was better into a rollercoaster of an intra-day equity ride. Talk from the top of VW of existential crisis, however small, is unhelpful because the markets are playing to the headlines in these rather dramatic climes for the company. Its stock did manage to end in the green, pulled higher by the overall stellar rise in the DAX, but it languished in the red for much of the session. Elsewhere, the iBoxx index managed to recover some lost ground, closing at B+168.6bp (-1.8b) with higher beta sectors leading the charge better (CoCos, hybrids and so on). The HY index managed a 10bp tightening to B+537bp. In iTraxx, Main tightened to 87bp (-4.5bp) and X-Over a whopping 25bp to 350bp from Friday’s closes.

Sole ‘corporate’ takes sub-benchmark sized funding… We had a new issue as Wendel printed a no-grow Eur300m, 4.5-year deal priced to yield a touch under 2%. Rated BBB-, the borrower isn’t the easiest of names to market, but the cheapness of the sub-benchmark sized offering no doubt enticed investors. We would not be surprised if Tuesday opens better, that syndicates get other borrowers to chance their arm and use the opportunity to get quick-fire deals away. Any calm will be seen as an opportunity for deals: there is a backlog of them to get done, after all. And finally, we had the rather curious case of the Province of Ontario pulling its 10-year euro deal. British Columbia printed a 10-year last week for Eur500m and it would have been no shame for Ontario to have taken less than the Eur1bn they might have wanted. An SSA borrower, offering some pick-up to secondaries, but it could not gain enough support. While not ECB-eligible collateral, it would still have been a place to park some liquidity and receive some yield.

The strong close in US equities (+1.8%) ought to feed through into a better open in Europe and we would think some more primary activity should that be the case. Have a good day.

5th October 2015

Oops, it’s Monday again

MARKET CLOSE:
FTSE 100
6,130, +58
DAX
9,553, +44
S&P 500
1,951, +28
iTraxx Main
91.5bp, -1.5bp
iTraxx X-Over Index
372bp, -11bp
10 Yr Bund
0.51%
iBoxx Corp IG
B+170.4bp, +1bp 
iBoxx Corp HY Index
B+557bp, unch
10 Yr US T-Bond
1.99%

The valuation’s wrong, it’s ridiculous… Oh no it isn’t. Glencore and Volkswagen debt is trading at junk risk levels, and the credit analyst community reports that this is unwarranted. Well, more so in the case of VW. The giant is too big to fail, has oodles of balance sheet cash, is still a profitable company, has a great product offering and once the brouhaha around the emissions scandal dies down will be funding in the public markets at give-away levels (to start with). What’s there not to like? Except that, for a fund manager, it’s never that simple. The market decides the price. Investor behaviour is to veer towards a positioning which protects performance. So when bonds are falling 2, 5 or even 10 points a session depending on the complex, few are willing to, wanting to, or going to look at the fundamentals. Liquidity and “what if” dominate the thinking – behavioural science comes into play. Specifically, in the case of VW, the group’s sustainable, superlative business (model) could be ravaged by untold fines. Investors have always hated uncertainty. Lest we forget that tap on the shoulder from the powers that be and the always dreaded “Why are you exposed to VW? Cut your position now.” The case for Glencore, to be frank, is even more difficult. Reports over the weekend suggest the company might be up for sale.The shorter end for Glencore yields 10-11%, the medium maturities 7-9% and the euro average single-B yield is roughly 6%. Overcooked?

We fear them, but here’s hoping… Apart from poor performance, the fear for most corporate bond fund managers is outflows. We continue to believe that one can still hide behind the “what else are you going to do?” technical of where to put any money – apart from keep it in cash. Certainly that is the case in the euro-denominated corporate bond market. But as we wrote last week, a market bereft of liquidity will be an unforgiving place to be if outflows do emerge, and so the defensive stance (higher cash positions being built) will be the trade for choice until stability and confidence return. Unfortunately, that means there will be no ratchet tighter in spread markets and new issue activity might be more subdued than usual, leaving overall activity much reduced.

NFP leaves much uncertainty… The weaker-than-expected non-farms print on Friday has again set the proverbial cat amongst the pigeons. That was a nasty NFP number and there is a zero interest-rate policy already: what can governments do about it?  It means lower rates for longer – no rate hike in October, and likely not in December. It means lower Treasury yields, lower Bund yields and all and sundry scratching their heads as to why the unemployment rate was at just 5.1%, yet there is no growth in hourly earnings and scant sign of inflation in the economy. Usually, stocks would be flying on the sure-fire prospect of easier money for a while yet. But while growth fears are on the up, it means lower earnings (unless corporates can continue to squeeze costs), investment remaining subdued and a close eye kept on capex budgets.

Credit could be back in fashion… It’s a funny old game. Equities neither hither nor thither on the prospects of lower growth, with the US seemingly unlikely to pull the world higher in its slipstream. Govvies bid up on flight-to-safety flows, leaving new money wondering where to go for a bit of safety and yield. Well, we still have a low corporate bond default rate. The ability for corporates to service their obligations is still the best it has ever been. The capital markets will be open for borrowers at still excellent historical funding levels should they wish to hoard more cash. Admittedly, the market has been scarred by the VW situation, and the price action around Glencore/commodity players has been a reason not to get involved. But there are plenty of boring, uneventful bonds available where one can clip a decent coupon, be assured of getting one’s money back at maturity and generate decent income. You can take as much or little risk as you like, but staying away from the ‘go-go’ situations will make for a easier existence. Boring has always been good in corporate bonds.

Volatile and unconvincing… Last week closed out in positive territory for stocks after a choppy Friday with that payroll giving everyone food for thought. Treasury and Bund yields fell, and credit endured a quiet but defensive session. That means it was weaker for choice. Spreads were inching wider overall, with hybrids and CoCos a tad weaker in price terms and few willing to get involved because not wanting to be exposed over the weekend. VW hybrids were up to 0.75 points lower in price. The iBoxx IG corporate index closed at B+170.4bp – almost a basis point wider in the session – with the HY index unchanged at B+557bp. In the synthetics arena, the iTraxx indices recovered a little (better offered) into those higher equities, and closed at 91.5bp for Main and 372bp for X-Over. The S&P closed 1.4% higher.

Spain was upgraded to BBB+ from BBB by S&P. And Alcoa kicks-off the third quarter earnings season after the closing bell on Thursday. Wishing you all a pleasant week.

2nd October 2015

New chapter, but the saga continues

MARKET CLOSE:
FTSE 100
6,072, +11
DAX
9,509, -151
S&P 500
1,923, +4
iTraxx Main
93bp, +3bp
iTraxx X-Over Index
383bp, +8bp
10 Yr Bund
0.53%
iBoxx Corp IG
B+169.6bp, -0.6bp 
iBoxx Corp HY Index
B+551bp, unch
10 Yr US T-Bond
2.04%

Chapter 10 of 12 and it’s the same story… We didn’t really expect to turn the page into a new month and meet our nirvana of rallying assets, and finally having put to one side the Fed, China, the commodity cycle and Volkswagen. Markets never draw a line in the sand – except for performance valuations. So the aforementioned quartet (there’s more) continue linger. Nevertheless, we tried to pull away from the troubles with a very good start to this month’s opening trading session. The early skirmishes were good but soon faded. No one knows why. Clearly few are convinced that we deserve to rally, ought to rally or can rally away the troubles. The economic data today (eurozone and UK PMIs, US ISM) left much to be desired that we’re any closer here to even economic stability. Glencore equity – and debt – was extremely volatile and for good measure, as German stocks fell into the red (-1.5%) after being up 1.5%, Volkswagen started to give up ground. Each headline – and usually they are a rehash of old news – or news flow we expect seem to be an excuse to sell VW paper. It’s not as if we don’t know that VW will be fined extensively and commodity-reliant companies such as Glencore are caught in a trap. The fast money community though are making hay while the sun shines for them, resetting shorts at each emerging opportunity. The resulting volatility is the real money (long-term) asset management communities bête noire.

Price action a function of atrocious liquidity and fear… Some of the price action currently being seen is the stuff of nightmares. And we don’t even have a global financial systemic crisis. Let’s be clear, many corporate bond fund managers do not have to sell. But taking some risk off the table and building in some defensive cash positioning, in case sizeable outflows materialise, might be seen as a sensible strategy/trade. But how does one do that when Glencore senior paper in a 5-7 year maturity trades as low as Eur66 (cash price) only a couple of days later to rise to the Eur80 area, and then back down to the low Eur70s?! That’s all in two days and Eur1-2m in size per enquiry, for example, all on headlines. Who said timing was everything? And that occurs against a background where stocks whipsaw between being in the red and black leaving the likes of the under fire VW cash senior bonds to open 30bp tighter, only to give most of it back as the session progresses. Admittedly, the rest of the complex held steady in the day with corporate hybrids (utilities mainly) remaining firm to perhaps a touch better bid.

The sucker punch comes early in Q4… Let’s be truthful, we were all lulled into a sense of security as we opened for business in Thursday’s session, but as it wore on the confidence and upbeat tone faded. The mixed picture will be added to today (Friday) once those non-farm payrolls are released. Anyway, credit did little apart from the moves highlighted above. We were left with the iBoxx corporate index for IG at B+169.6bp and essentially unchanged with the HY index stuck at B+551bp. Hybrids and CoCos managed small gains and the rest was left pretty much unchanged. The iTraxx indices moved higher but the need the session wider, better bid as equities slipped with Main at 93bp (+3bp) and X-Over at 381bp (+8bp). On the supply front, the Finnair hybrid issue takes the plaudits. It was rather opportunistic to go ahead with the deal, but the syndicates got it right with the mood of mainly, we would think, Nordic investors prepared to fund the airline. Interest was so good that the borrower managed to increase the size of the deal from Eur150m to Eur200m. It helps that the deal was cheap, that Nordic funds are almost desperate for ‘local’ paper (book just under 2x subscribed) and the 7.875% yield no doubt was too good to miss for this national flag carrier.

On a housekeeping note, this site is now a month old. May we take this opportunity to show our appreciation to all our readers who have visited the site, commented on it as well as on the reports and have signed up to receive the daily email. We hope it helps you in facilitating your investment decisions.

Have a good day and a restful weekend.

1st October 2015

Credit spreads forecast poll, September: Result

Market participants predicted the following result to the question:

Our first poll in the series asked our email subscribers and website readers whether credit spreads, as measured by the iBoxx Investment Grade Corporate Bond Index, would be closer to B+130bp or B+150bp by the end of September. The index closed August at B+138bp and after index constituent changes, opened September at B+140bp. The final polling result was a close call, with 54% of those who voted on the bullish side and plumping for 130bp while 46% of voters were more circumspect and suggested 150bp.

Huge supply in early September and some nerves around the Fed meeting saw spreads wider by a considerable amount to B+149bp into the middle of September, but China growth concerns escalated and the VW situation struck. We hurried past the 150bp mark and topped out at B+172bp, with weakness coming from autos and basic resources. The latter were impacted by those growth fears, with Glencore, Anglo American and ArcelorMittal particularly weaker. At B+170bp, where we end September, we are 59bp wider than where we started the year and 30bp wider on the month. It has been a very difficult month, clouded by those aforementioned events, and it looks as if we will end the year much wider versus where we started it (at B+111bp) given that the Fed, China and VW uncertainties are unlikely going to be resolved anytime soon.

For the record, the HYindex closed at B+551bp, around some 90bp wider in the month.

1st October 2015

It can’t get any worse

MARKET CLOSE:
FTSE 100
6,062, +152
DAX
9,660, +210
S&P 500
1,920, +35
iTraxx Main
89.75bp, -1.25bp
iTraxx X-Over Index
373bp, -10bp
10 Yr Bund
0.59%
iBoxx Corp IG
B+170.3bp, -1.7bp 
iBoxx Corp HY Index
B+551bp, unch
10 Yr US T-Bond
2.04%

Let’s hope Q4 is better… The third quarter was bit of a shocker and has left us all in a daze. Who would have thought that corporate bond spreads would come under so much pressure? The corporate bond market had, after all, assumed safe-haven like status to justify those solid debt (servicing) characteristics. As measured by the iBoxx corporate index, IG spreads were 25bp wider in the month, HY some 90bp and returns negative across the board (monthly and YTD). These moves represent the worst monthly spread weakness in an age! Unfortunately, it might be a while before we see a significant recovery. After all, there are some big ill winds that are blowing nobody any good. The Fed is undecided still, Chinese growth fears are escalating and one of the darlings of German industrial might is embroiled in scandal along with giants like Glencore, in existential crisis given the severe equity and debt price moves. Have the markets really been so taut with anxiety as to expect that the rising tide on the back of easy money could always sustain undeserved valuations? They must have been, but we never really believed it; we all just went with the flow. It worked for several years. The money came in, there were performance and management fees to justify, everyone else was doing it, so why not? Flippancy aside, there has been much anxiety of late given that the low-hanging fruit had been picked and it was always difficult to see what could help credit markets, for example, rally further. The sheer volume of cash coming into the corporate bond market, looking for investment in a higher-yielding, safe, fixed-income asset and the lack of a credible alternative was and is the driver. Now, with the back-up in valuations we have seen, we need to start again. The offered-side liquidity can be found. The problem is, who is going first?

Poor liquidity begets poor liquidity… Poor secondary market liquidity has been a developing feature of this longstanding financial crisis, coming as a result of the almost hysterical and ill-thought political and regulatory response to it (see previous notes). There was a time when we would panic or rejoice at, say, the DAX moving +/-200 points (+/- 2-3%) in a session. Not any more. It’s become the norm. We just trawl the news for the headline, but we also know that this size of move is predicated on much lower flows than the number ought to otherwise suggest. Anyway, the DAX was up over 200 points today and the headline was around the eurozone being in deflation again, meaning that the market now expects the ECB to increase its QE programme, putting even easier money on the table. It also meant a better close for this month as positions were squared (short covering). Credit followed suit and we saw some price recovery across the board.

Big move in equities, subdued in credit… We closed out September with 2%+like moves in most equities. The corporate bond market didn’t quite register the same kind of elation. Naturally, we saw some recovery in VW, Glencore and others which were down and out in previous sessions. Likely a mix of short covering, opportunistic adds, some bottom-fishing and reloading ahead of the new quarter. VW cash might have got 50bp back and its 5-year CDS 20bp (to 270bp mid), but that’s only a small consolation. The flows were mixed and probably for better sellers into an improved, decent bid and returning liquidity. The moves were generally more measured, and +/-1-2bp across low and high beta risk is little to get warmed up around. Corporate hybrids were better too, with VW leading the way albeit off very distressed levels. Noise. The iBoxx IG corporate bond index closed at B+170.3bp (-1.7bp), but that’s 20bp wider this month. The HY index closed unchanged and that would not have been the case normally when stocks rally so much. In synthetics we only inched better too, with S24 iTraxx Main at 89.75bp (-1.25bp) and X-Over at 373bp (-10bp). Again, quite unusual.

Don’t expect too much today, the focus will be on Friday’s payrolls.

30th September 2015

Red letter day

MARKET CLOSE:
FTSE 100
5,909, -50
DAX
9,450, -33
S&P 500
1,884, +2
iTraxx Main
92bp, +1bp
iTraxx X-Over Index
383bp, +8bp
10 Yr Bund
0.58%
iBoxx Corp IG
B+172bp, +6bp 
iBoxx Corp HY Index
B+552bp, +16bp
10 Yr US T-Bond
2.08%

Time to take stock… It’s a sorry picture for risk assets. US rate risk, China’s economic slowdown and VW’s burnout all saw to it that September has been the cruellest of months. It’s not the worst year credit has seen, despite protestations and comments elsewhere to the contrary. In 2008, for example, credit lost 5%. Nevertheless, investment-grade corporate bonds have given up 2% YTD (iBoxx) and 0.75% in September in absolute terms. For the benchmark players, spreads are 61bp wider YTD and an eye-watering 32bp wider in the month alone on the index. It’s worse than that for most though, given the higher beta positioning many investors have, leading to underperformance versus the benchmark as a result. Non-financials are returning -2.3% YTD and financials -1.2%, as we might expect. The beaten-up sectors are autos and basic resources, and the product most under fire has been corporate hybrids, given that VW makes up much of the index, having over Eur7bn of them outstanding. Still, we do not anticipate much by way of outflows from IG funds. The HY sector was in great form – until last week. Returns YTD now come in at -1%, but all of that has been lost in the last few days of September. For the month, HY returns as shown by the iBoxx index are at -2.75%; outflows will surely follow into October. Spreads have gapped 94bp in September and 117bp for the year thus far. And it is the weakness in HY spreads which has contributed to the poor performance, because the shorter duration nature of the HY market has seen to it that the anchoring of the front-end of the underlying has helped to keep that side of the performance contribution well-supported. It’s worth noting that sterling credit has done very well in comparison. Spreads are only 30bp wider YTD but returns in the same period are at -0.7%, while for the month sterling corporate bonds returns are flat (with Gilts at +1.4% YTD). Sterling by name, rock solid by…

It’s bad for corporate bonds, but worse for equities… The DAX is down around 2.5% YTD, but that hides many ills. It was up 25% YTD in mid-April. We could go on, with EuroStoxx50, the FTSE and the CAC. You get the picture. We have said for years that this crisis which began in 2008 was about preserving capital. Thats why corporate bonds have been – and we believe still are – worth their weight in gold. There will be a time to bailout, it’s just not yet. We wouldn’t be putting a capital appreciation strategy in place (buy equities, sell credit) until we are sure that we have a sustainable growth dynamic. That could still be a long time coming. And when it does come, if the growth path and trajectory suggest the rise will be rapid, then corporate bonds will come under huge pressure as sellers seek non-existent buyers. What we have witnessed in September will be a walk in the park in comparison. And that will come while the economy is improving! Who said the markets were being manipulated? Anyway, don’t fret. It isn’t going to happen anytime soon. On the bright side, ECB QE and the potential for more to come has seen to it that despite the mid-year sell-off, sovereign debt has performed well. Eurozone sovereigns have returned around 1.5% in September and 0.7% YTD.

Fixed income still works… Overall, fixed income markets are still holding out. Returns everywhere are poor/falling, but with a low default rate, capital preservation has been the modus operandi of the investment process and we believe should stay that way. If it was just China and the Fed, our market (corporate credit) would have been in much better shape. Alas, the VW-type of event risk is something no one can position for. The global picture is as uncertain as it ever was, visibility on macro as poor as ever and the requirement has to be to stay defensive. So we do not expect any material outflows from the asset class, except for some HY funds that might come under pressure because outflows are dependent on monthly returns. That’s just the nature of the beast.

Tired into month-end… As we could have expected, the penultimate session was on the defensive, and even bit of a bounce was observed in some quarters as the likes of Glencore fought back. Well, their stock did on the back of some upbeat broker comment, bouncing 17%. Equities traded blows between red and black, and in a tight range for much of the session. VW’s stock was a small down. Germany inflation came in at a negative 0.2% and points to a low/zero-like figure for the flash eurozone figure out later today (Wednesday). In credit, most of the activity was around squaring up positions into month-end, sorting portfolio valuations (see above) and doubtless many a meeting to discuss strategy and positioning for the final quarter. Specifically, Glencore paper moved a little higher (in price) amid small buying interests, VW was rangebound amid two-way flows and the rest was simply weaker. Overall, little conviction anywhere. Weakness in Asia markets saw to it that the much exposed Standard Chartered was seeing much action, its 10NC5 LT2 now at around B+500bp (+50bp).

The iBoxx index closed at B+172bp for IG (+6bp), and B+552bp (+16bp) in HY. All very weak. The iTraxx indices followed stocks, just marginally weaker. Wednesday sees flash inflation numbers for the eurozone, and no doubt much more will follow on the need for expanding the size and scope of the current QE programme by the ECB. KFW issued a three year zero coupon deal for Eur5bn, allowing some to park cash for no (limited) cost.