Suki Mann

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16th October 2015

Investor positioning poll for Q4, 2015: Results

Our latest anonymous poll asked investors how they were positioned for Q4. Given the weakness in August and September in all risk markets, we are surprised to find that 41% were overweight portfolio beta with 29% neutral and 29% underweight. The poll was conducted in the first week oInvestor Poll Results Credit Market Dailyf October and into the current rally, so maybe that was an influence.

Investor cash positions are high, the primary market has delivered less than Eur6bn of non-financial IG corporate bond issuance (against a 5-year average of Eur15bn, Dealogic data) and secondary market liquidity is offering no assistance. Into that triumvirate, any lifts has seen spreads move disproportionately tighter.

Sentiment has been boosted by the ongoing weak macro because it means quite likely the Fed will not be raising rates later this month. Loose policy for longer keeps risk assets better bid. October has shown a good recovery (iBoxx IG index -9bp) and it seems that most expect the rally will continue through the rest of the month and quite possibly the quarter.

According to our poll results, investors are positioned for a rally.

 

16th October 2015

Falling knife… where?

MARKET CLOSE:
FTSE 100
6,339, +35
DAX
10,064, +149
S&P 500
2,024, +30
iTraxx Main
81bp, -0.5bp
iTraxx X-Over Index
339bp, -3bp
10 Yr Bund
0.55%
iBoxx Corp IG
B+160.6bp, +0.3bp 
iBoxx Corp HY Index
B+510.7bp, -2.5bp
10 Yr US T-Bond
2.01%

At last, the penny has dropped… We are in danger of taking on a day-trading mentality. The BHP deal across the hybrid complex trades up two points or so and all of a sudden the commodity cycle downturn is over, the desperate bid for risk assets is back with wanton abandon and the global economy has stabilised, with a sustainable growth dynamic in place where rate rises are still likely to be limited and have little impact on risk asset valuations. Don’t you believe it. It’s not like us to advise caution, but we are not getting carried away with the rally or the receptivity to the BHP deal. It helped that deal that equities are up, but if we get a down day or two on the back of some poor data, this deal will get hit and likely quite hard, given that – being the latest large transaction of high-beta ilk – it is liquid. It will be the first to go. Nevertheless, we do like the improvements in tone, and we believe that the general trend is for tighter spreads (higher cash prices). Supply hasn’t been great (Eur5.5bn or so for IG corporates MTD) and investor cash balances are too high for this time of the year. That ought to support spread product, and we remain upbeat for corporate spreads through the final quarter. Oh, and lest we forget, the Fed isn’t going to be raising rates this month; the ECB is in a quandary. Govies will rally or remain firm (the 10-year Bund yield visited 0.52% today); all roads lead to corporate bonds – again.

Difficult macro and poor earnings come at just the right time… More weak data points, a weaker dollar, a stronger euro and a very mixed earnings stream mean that US rates will stay unchanged. So risk assets will rally, and we push out the moment of real pain a while longer. It will come. In the meantime, we feed off the continued loose policy stances, with the ECB now odds-on to announce something in addition to its existing QE programme. The euro’s strengths into German economic weakness amid Asia’s slowdown means further action is required. No word about medium to long-term structural changes – that’s not a vote winner. On the earnings front, Goldman’s missed, Citi beat and after WalMart’s shocking profit forecasts yesterday there was no dead-cat-bounce today in its stock, which had fallen almost 9% in yesterday’s session. US CPI saw the headline at -0.2% MoM and flat YoY and the Philly Fed index was still showing contraction in manufacturing in the region, albeit at a slower pace. Not good.

Frustration at the lack of issuance… After the success of the BHP deal, one would be forgiven for assuming that it would flush out other borrowers. But no. Nothing on the non-financial corporate front (the Deutsche Bahn Eur200m floater tap underwhelmed), although we had just about everything else. Are borrowers suddenly less needy? Have syndicates/bankers lost their nerve? Are we all reading this market wrong? The demand is there. The funding is available. The new issue premium won’t be as great as it was, say, last week or even earlier this week. What’s not to like? We’re unlikely to see much today (Friday) and if we do, it will quite possibly be just a token-like/gesture of a deal.

Equity bounce lifts all boats… European stocks had a good session, with near 1.5% gains across the board. Feed into the equation the poorer or weaker macro data points and so on and implications for US interest rate policy, and we see it is risk on. In a way, the next leg of the rally has been underwritten. Credit overall though seemed more circumspect in today’s session and even the lack of dealer inventory didn’t assure a good old fashioned squeeze. We’re waiting for new paper! The iBoxx IG corporate index edged out to 160.6bp and the HY index finished at B+510.7bp, -2.5bp. For the synthetics, Main was at 81bp and X-Over at 339bp, both only slightly better versus the previous close.

Have a good day – the S&P closed up 30 points (+1.5%) and good weekend. Back Monday.

15th October 2015

Who dares wins

MARKET CLOSE:
FTSE 100
6,270, -73
DAX
9,916, -117
S&P 500
1,994, -9.5
iTraxx Main
81.5bp, +1.5bp
iTraxx X-Over Index
342.5bp, +11bp
10 Yr Bund
0.54%
iBoxx Corp IG
B+160.4bp, +1.3bp 
iBoxx Corp HY Index
B+513bp, +6bp
10 Yr US T-Bond
1.98%

Blown away the froth, time to taste what’s underneath… After the big bounce in risk assets last week, where there was real demand for corporate bonds, we ought to have pushed on this week. Nothing really changed apart from a few data points around weak macro which we knew were coming and should have had little real impact on the corporate bond market. Today it was the weak consumer price inflation and factory gate deflation in China and expectedly weak industrial production in the EC US retail sales in September rose less than expected and the August numbers were revised down. So this week has become bit of a lost one, shrouded yet again in a cloud of uncertainty – largely of our own making. Secondary has quietened after a fairly upbeat tone and good mood on Monday, and primary has disappointed to an extent that one would think the willingness of investors to add risk and of syndicates to push deals has completely evaporated. The demand is there, as evidenced by the books on the few deals which have managed to print this week. There is a price for everything; some are just lacking the vision. Bravo therefore to BHP today, with a multi-tranche, multi-currency testy hybrid deal on a risk-off day amid worsening macro data. A case of getting the funding in before the commodity situation worsens further – or time to add commodity risk?!

Let it go, let it go, let it go… Admittedly, when stocks do come off so much (DAX back below 10,000, -1.2%) it’s easier to sit back and let it all pass by. And that’s what is actually happening. BHP’s euro/sterling/dollar hybrid is proving to be an exception. As we suggested above, the demand is there and at least someone had the wherewithal to get the deal on the screens and the borrower has his (capital) funding in. The books were just skewed towards the dollar tranches, but we did get almost Eur6bn of orders for the euro tranches (Pnc5.5, Eur 1.25bn, 4.75% coupon and Pnc9, Eur750m, 5.625% coupon) and over £1.6bn of interest for the sterling one (Pnc7, £600m, 6.5% coupon). That was very good considering the state of the market and the industry of the issuer, but it does also show the demand for yielder risk assets. Added to that, state-owned operator Deutsche Bahn was back with a 10-year deal for Eur600m (with just a 1.25% coupon), following up on its longer-dated floater last week. The monthly supply total is now around Eur4.5bn, which is still low compared to the average of the last 5 years (Eur15bn, Dealogic data).

Elsewhere, sideways except for the obvious… Secondary cash was fairly quiet and weaker, but VW and Total SA hybrids were under some particular pressure again. Subordinated insurance paper was slightly better offered too. CDS was weaker, along with stocks and iTraxx. There were few sellers again, which is to be expected, and investor cash balances are at high levels, hence the need for the primary market to come good. European stocks were looking as if they were going to end off their worst levels for the session, but that idea was laid to rest when Walmart piped up with a poor outlook for fiscal 2017. That wiped almost 10% off its stock and took the S&P/Dow lower with it. So we again have poor economic data from the US pouring water on prospects for an October or even 2015 rate hike over there. Treasuries rallied with the 10-year back at 2.0%, the dollar weakened and the ECB will be exasperated. A stronger euro will hamper recovery in the eurozone and so the European central bank will have to be adding more stimulus soon in the race to the bottom. The 10-year Bund yield was down at 0.54%.

In the end… The iBoxx IG index was up at B+160.4bp (+1.3bp), with the usual higher beta sectors bearing the brunt of the weakness. The HY index was at B+513bp (+6bp). In the synthetics, S24 Main was higher again at 81.5bp (+1.5bp) and X-Over at 324.5bp (+11bp). Volkswagen is now under investigation by the Federal Trade Commission (FTC), and while we’re not sure what that means (false advertising?), it can’t be good.

Let’s be careful out there.

14th October 2015

High Yield or Emerging Markets?

MARKET CLOSE:
FTSE 100
6,342, -29
DAX
10,033, -87
S&P 500
2,004, -14
iTraxx Main
80bp, +2bp
iTraxx X-Over Index
331.5bp, +8.5bp
10 Yr Bund
0.59%
iBoxx Corp IG
B+159.5bp, +0.5bp 
iBoxx Corp HY Index
B+507bp, +1.5bp
10 Yr US T-Bond
2.04%

European high yield versus emerging markets… Corporates in both sectors occupy the same arena in terms of slowing global growth dynamics affecting the top line. The top line matters because it helps generate that cash buffer needed to feed interest payments. And the Chinese import numbers (-20% yoy in September), should have the warning bells ringing for everyone – if they weren’t already doing so. The Fed will be listening, the ECB will be readying plans to extend the scope of its QE programme, investors will be fretting about risk asset valuations and central banks generally wondering what next. Zero interest-rate policy hasn’t quite worked out how we all hoped. They’ve pushed on that string for so long and in so many ways that we’re not far off the point where they might try something completely unconventional. That’s the hope, anyway. In the meantime, China’s economic slowdown will have repercussions throughout the emerging markets, while the developed ones will also feel the heat but remain better protected against the slower growth dynamic for a little longer (that’s why they’re called ‘developed’). In credit, corporate dynamics are going to come under pressure and we don’t see any heroism in trying to pick off cheap EM corporate bonds. You won’t be thanked for it. A better option, in our view, would be European HY, especially for buy-and-hold investors. The double-Bs continue to offer value (low default risk too), as do good single-Bs. Europe will more than likely slow again, but unless growth is hit by a cliff-event, the HY sector for the “widget-making” entities will manage to scramble across the line. These corporates usually have a business that can withstand an extended period of low(er) growth.  We are back in the investment process, where we are looking for incremental yield and a relatively safe asset. There’s much to be said for these solid companies, despite their higher leverage.

UK inflation dips into negative territory again… No rate rise in the UK any time soon, and the bid for sterling corporate bonds will also remain intact – but from the traditional players. Tuesday’s inflation numbers will see to it that the BoE is sidelined for a good while yet. Sterling credit has outperformed euro-denominated credit this year while displaying hardly anything like the same level of volatility. Unfortunately, the sterling corporate bond market is quite small and is a longer duration market, more illiquid than euros/dollars and controlled by a few large players. The information ratio is low. We don’t expect traditional euro investors to move over looking for better pickings for those reasons, but those who do/can will find value.

Slim pickings still in primary… Dutch electricity grid operator Enexis was the sole corporate borrower, with a Eur500m no-grow deal at midswaps+87bp off a Eur3bn book. The deal was tightened up from an IPT of midswaps+95bp, so good for the borrower and good for the syndicate championing the success of the demand. Not so great for the investor, left holding the baby as we move on to the next deal. This is always the case. Anyway, the current level of corporate issuance, at just over the Eur2bn mark for the month to date, is extraordinarily low, given that we have averaged Eur15bn (Dealogic) per October since 2010. The corporate bond market isn’t exactly in panic mode, but there have been some increased levels of idiosyncratic risk, macro leaves much to be desired and the next Fed meeting looms large. There are deals to get done, but as we suggested last week, blue chip issuers don’t want to be first up on the screen with cheap deals. The shame of it!

No Super Tuesday, let’s hope for a happier Wednesday … So the much lower than expected Chinese import numbers saw to it that we had a tougher session on Tuesday. Equities reacted as we would expect – lower. The weaker German ZEW business survey didn’t help, but it is less of a forward indicator. The UK inflation report added to the general feeling of malaise. Johnson & Johnson announced a $10bn share buyback programme but missed on earnings and InBev finally got its hands on SABMiller. In secondary, we saw some weakness, but generally outperformance with few willing to let bonds go and few willing to offer. Illiquid markets have a habit of making sure we keep our heads while others maybe losing theirs! The slight widening was noise in the big scheme of things.

And finally, JPMorgan Q3 missed, US stocks closed in the red… and Intel was upbeat for its Q4 revenues. Primary will make our day. Have a good one.

13th October 2015

Super Tuesday?

MARKET CLOSE:
FTSE 100
6,371, -45
DAX
10,120, +23
S&P 500
2,017, +2
iTraxx Main
78bp, -2bp
iTraxx X-Over Index
322bp, -5bp
10 Yr Bund
0.58%
iBoxx Corp IG
B+158bp, -1bp 
iBoxx Corp HY Index
B+506bp, -2.5bp
10 Yr US T-Bond
2.09%

It was another Monday in October… and they do not usually come as lively as this one too often. Facetiousness aside, the Columbus Day holiday in the US ought to have put paid to there being much of a follow-through from last week’s upbeat tone. Well, it didn’t. Admittedly, primary was mostly about covered bonds, but secondary cash was very strong amid little activity because liquidity is so poor, the iTraxx indices were slightly better offered (lower) for choice and stocks plus or minus a little bit around zero. The news flow was again about Glencore and asset disposals, with the vultures circling, and that big deal in the US with Dell buying EMC for $67bn. The German nuclear decommissioning report suggesting enough funds were set aside helped German utilities take a leg higher. There is still no panic among investors in Europe regarding M&A activity this side of the pond. It will remain idiosyncratic, usually take in a defensive structure so as to not obliterate hard- fought and hard-won credit metrics and likely continue with the current trend of asset divestments which are non-core. M&A has had a good year globally, but few deals – in Europe anyway – have caused much concern. And they won’t in the sense that the uncertain economic outlook will prevent a wholesale M&A debt binge for a good while yet.

Rating agencies starting to get a grip on VW… S&P downgraded Volkswagen to A-, and the negative outlook reflects the continued uncertainty around the group. This is no ‘slashing’, but a moderate first step by the rating agency to quantify the risks involved. VW’s debt has already moved sharply lower, with some of its subordinated paper in junk territory from a valuation perspective. The next step might see some more severe price action should the borrower’s ratings fall into the triple-B category, whence we might see a little forced selling, with a poor bid on the other side exacerbating downside price action. That said, it’s pretty much certain further downgrades are coming, so we would think that much of it ought to already be in the price.

Another deal pulled, but it’s not a harbinger of things to come… SRV Group, a Finnish developer, became the second company to pull a deal in two days after Technip last week. For Technip we can understand investors’ hesitation to get involved given the oil industry dynamic of the group’s operations. For SRV, well, an unknown, small Finnish company would need to offer some fairly juicy and easy upside given the group’s highly indebted balance sheet. Given the almost captive, local audience of the investor base, for them to refuse this deal makes it unlikely we will see this borrower again (or not for a good while).

Strong secondary market starts the week in upbeat fashion… The tone in credit was firm across the board with low beta generally 3-4bp better, although there were some gappy moves taking in 8-10bp. German autos in particular took up some good upside (BMW and Daimler) and are pretty much back at pre-VW crisis levels. The likes of EON and RWE amongst other German utilities were anything up to 25bp in senior and 4 points higher for their hybrids. These were big moves in any sense of the word. Headline event risk aside, the lack of liquidity is going to keep this market well bid. The lack of supply is going to have the same effect, and we would question whether moderate supply levels would even check the tightening trend. This helped the iBoxx close better at B+158bp and returns for IG credit are up at 0.5% for the month. In HY, we edged be better to B+506bp, with returns for the month up at 1.6%. The iTraxx indices closed slightly better at 78bp and 322bp for Main and X-Over, respectively.

The primary window is open, we just need a deal or two… have a good day.

12th October 2015

Add into the bounce

MARKET CLOSE:
FTSE 100
6,416, +41
DAX
10,097, +104
S&P 500
2,015, +1.5
iTraxx Main
80bp, -3bp
iTraxx X-Over Index
327bp, -14bp
10 Yr Bund
0.61%
iBoxx Corp IG
B+159.5bp, -2.5bp 
iBoxx Corp HY Index
B+508bp, -6.5bp
10 Yr US T-Bond
2.09%

All bulled up and tighter to go… The risk asset rally is back on. Led by equities, it has drawn in credit too. We’re a fickle bunch. Few bought into the dip – add into the bounce. Torrid August and horrible September are long forgotten: good riddance. The third quarter earnings season is upon us and most corporates will likely beat lowered expectations (as is usually the case), perhaps giving reasons for stocks to push on. The Fed minutes suggest it looks increasingly likely that October won’t be the month to raise interest rates, giving stocks additional impetus. Corporate spreads will rally into the slipstream left by rising stock markets. Actually, they are doing that already. Glencore is better, VW will continue to languish, DB will raise what it needs to get its capital position in order and we all await primary to goad us back into the market. Our market has had a good week, and we suspect that it will turn out to be good month, where we gain back much more of September’s losses – and a complete recovery would not be asking too much. Fundamentals for corporate risk are intact – always have been; now we just need that improved confidence to turn into more than the odd borrower chancing its arm. Expect larger than normal IPTs, but also expect them to be ratcheted tighter once those books start to exhibit some good interest. And off we go again.

Riding the rally through the quarter… Some would have caught the bottom early last week or even the week before, others would have been frustrated at not being able to lift paper as spreads started to tighten, with dealers reluctant to let any inventory go as we bounced. Most will be delighted with the recovery. Now it’s about getting some risk on board and that will come through primary, as we do not expect secondary market liquidity to offer much assistance. Dutch utility Gasunie printed an unremarkable Eur300m no-grow floater on Friday, and the monthly IG non-financial supply levels to date sit well below the Eur2bn mark. Nevertheless, if we see the broad market confidence being sustained, new issue premiums will fall and that will entice other players out. Eur10bn or a little more for the month is a reasonable target to aim for.

No grabfest, there are no bonds… The iBoxx IG index closed Friday’s session 3bp tighter (-10bp for the week) at B+159.5bp. All sectors were better into a very strong session, with little of that aforementioned liquidity around, helping the squeeze. For instance, the higher prices in hybrids and CoCos saw the former recover almost 50% of their post-VW losses last week alone, while the AT1 market was likewise in the ascendancy and not derailed by the potential for some volatility from the Deutsche Bank situation. We think another 20bp of tightening in IG corporates is possible, which would mean all September’s widening would have been recovered. In HY, the index tightened by 6.5bp on Friday, or some 39bp in the week. We look for 30-40bp of tightening over the next 2-3 weeks and that will hit our B+475bp iBoxx IG target for the month,which we set out in previous commentary. For the synthetics, iTraxx Main was lower at 80bp (mid, -3bp) and X-Over at 327bp (-14bp).

This week sees the earnings season come to life with the likes of JPMorgan, Citigroup, Goldman, BofA, GE and Schlumberger reporting, and we have retail sales and inflation data on the macro side. Have a good week.

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:

Days
Hours
Minutes
Seconds

                   

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.