Suki Mann

Author Archives: Suki Mann

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.

29th September 2015

Deflating the global asset bubble

MARKET CLOSE:
FTSE 100
5,959, -150
DAX
9,484, -205
S&P 500
1,882, -50
iTraxx Main
91bp, +7bp
iTraxx X-Over Index
375bp, +26bp
10 Yr Bund
0.58%
iBoxx Corp IG
B+166.8bp, +6bp 
iBoxx Corp HY Index
B+536bp, +17bp
10 Yr US T-Bond
2.09%

The much needed shake-up, or something more sinister…? Are we in the throes of a good old fashioned repricing of assets after years of being propped up by artificial means? It isn’t the Fed we worry about – they’re not going to move in October and if they do, it will have little impact. The drip-feeding of bad data from China – today industrial profits at multi-year lows – is threatening to turn into a torrent. They are deflating the global asset bubble. We are snatching defeat from the jaws of victory as concerted global QE has failed to elicit a steady, sustainable rise in growth. The slowdown in China will take in the US much harder eventually, and the might of the German industrial machine is also going to see a significant slowing. That’s before we get into the VW story. It’s a real mess and we’re caught in the headlights. That means no decent bid on anything, poor liquidity exacerbating price action and a fairly depressing read for performance when those month-end marks and client valuations go in. It will be worse for equity-exposed investors. For corporate bond markets, it’s stick to what it says on the packet: Buy and Hold. Clip the coupon. Money back usually assured at maturity. Let’s hope that this is no turning point, that the ship steadies, that the US can weave her magic and we see out the year amid calmer climes. Here’s hoping, anyway.

It’s not a pretty picture, name your price… Yuck. So much for the bounce at the end of last week. Few were convinced anyway, given the lack of positive price action in the corporate market. And so Monday turned out to be a very difficult session as we woke up to news that Chinese corporate industrial profits had fallen almost 9% to multi-year lows. Commodity players took a hammering, with Glencore the obvious first victim. Its stock was down almost 30%, its bonds in free fall, its 3-5 year CDS curve flat and its strategy to dominate the commodity world in tatters. Glencore’s 1.75% 2025 issue was down 6 points, at a cash price of Eur62.5 mid. The situation took in ArcelorMittal (up to 2 points lower), Anglo American (over 40bp wider) and the likes of commodities trading group Louis Dreyfus (+40bp). Oh, and just about everything else, with low-beta risk widening by 3-5bp and high-beta paper by up to 20bp amid little real visibility. VW’s 5-year CDS gapped 30bp (mid 260bp) and its cash bonds by up to 40bp. With news that German prosecutors had opened up a criminal probe into the departed VW CEO and that Audi suggested 2.1 million cars are likely affected by the emissions debacle, the stench of crisis is going to linger around one of the darlings of the German industrial machine. Stay away.

And no global systemic crisis, just a slowdown to contend with…We have an impending global slowdown – again – but this time led by China. And it matters. It is not driven by crisis in the global financial system. Some would say that QE has failed, it just pushed on a string. Whatever, that translates into lower profits and investment, potentially lower employment and a whole gamut of direct and indirect effects on the growth and political front. What about credit? Well, the most important factor is liquidity. There isn’t any. It’s what we feared all along when investors felt the need to exit en masse. The door isn’t wide enough, or rather the bid isn’t deep enough. The political and regulatory response to the 2008 crisis simply got it wrong. Counter-cyclical policies need to be in place, but instead we had a tightening of standards and the creation of an overly defensive banking sector as a result. Capital is expensive, and the banks are not employing it in the same way, or in the same amounts, as they did back in the ‘good old days’. That means we get little appetite for risk from the natural absorber of risk in a crisis scenario – the trading desks. Hence the latest severe price action. It hurts – and it can get worse. Whether it does or not depends on whether we really do see a wholesale exit from the asset class. We don’t think we will. Corporate bonds offer better downside versus equities and better yield than government bonds, and have defensive characteristics which will help them maintain their allure versus the aforementioned alternatives

So nurse losses and wait for the calm to return… Returning calm? That’s a big call on China managing a soft-landing for its economic slowdown, on the VW emissions scandal not snaring others – and on the Fed delaying a rise in rates. Unfortunately, they’re all slow-burning fuses. Other situations will also brought into the fold, but we might get lucky. For now, well, it was a case of battening down the hatches. After the comment we made in yesterday’s note about the iTraxx indices behaving with little of the volatility we’ve seen in stocks, well, they didn’t today! Main was up at 91bp (+7bp) and X-Over rose to 375bp (+26bp), with the old contracts back at their August wides. As well as the aforementioned price actions, it was notable that the VW hybrids were back at their lows, losing 3-4.5 points across the curve, and AT1/CoCo paper was off up to 0.75 points. Nothing was spared. It passed me by that Alcoa is splitting its metals and business, that Vodafone’s tie-up with Liberty isn’t going ahead and that we had a vote in Catalonia, Spain which ought to have been given more attention.

Red mist in the numbers… A sea of red saw the Dax fall 2.1% and through 9,500, the FTSE 2.5% and back through 6,000. In the US, the S&P was down over 2.5% and below 1,900 (-50). The 10-year Bund yield dropped to 0.58%, Bono yields to 1.92% (-11bp) and USTs to 2.09%. The iBoxx IG non-financials corporate bond index closed higher at B+167bp (+6bp) and almost at 2-year highs. The basic resources component of the index was up at B+406bp, or a whopping 100bp wider today! It has doubled this month. The non-financial hybrid index was 26bp wider and the auto index 20bp weaker. There were some safe sectors, but they also might come under pressure if we get (unexpected) fund outflows. As for HY, the index was at B+536bp, some 17bp wider predicated on little news flow worthy of the weakness. Just contagion. And finally, Schipol Airport got Eur300m in 11-year funding away. Ho hum.

Dare I say it. Have a good day.

28th September 2015

Canaries, coal mines, Volkswagen, opportunity

MARKET CLOSE:
FTSE 100
6,109, +148
DAX
9,689, +261
S&P 500
1,931, -1
iTraxx Main
84.5bp, -1.5bp
iTraxx X-Over Index
348bp, -6bp
10 Yr Bund
0.65%
iBoxx Corp IG
B+161bp, +1bp 
iBoxx Corp HY Index
B+518bp, +1bp
10 Yr US T-Bond
2.16%

False start to the sales… A couple of weeks ago we suggested that once the Fed was done (our call was for no rise), the weakness we had seen in corporate bond spreads through August and September emanating from the uncertainty of it – as well as the huge levels of primary supply – represented a buying opportunity, and it would be time to go shopping. After all, with the Fed done and dusted until perhaps December, the rest of the unknowns were quantifiable. That is, we knew that China was/is a source of headline risk and volatility, that global growth is slowing, that Europe is failing to break out of its dual low/no growth/inflation dynamic and that geopolitics are as difficult as they have ever been. Hopefully, few heeded our message. Because the VW emissions scandal – which is still developing – has turned out to be the canary in the coal mine, and it has changed the picture completely. It’s like the sales are on, the doors have opened, but we’re waiting for the damaged stock to be put out at rock bottom prices before we get stuck in. In a way, investors are staying away until the bandwagon is in view – though usually by then it’s too late. We won’t catch the bottom, we might need to take some pain going in too early, but cheapening corporate bond prices in industries/areas not impacted by the VW story have to be worth a look at. That is, the contagion impact from the auto-emissions debacle is an opportunity – but timing is everything.

Month-end dynamics playing their part… Time will tell, but for now, as we near the end of September, we think monthly/quarterly dynamics are playing their part in investors’ willingness to take risk. There will be some sizeable hits to portfolios given the weakness, but other asset classes have fared worse. The big picture shows that IG corporate credit (iBoxx index) has lost 1.4% YTD and spreads have widened by 50bp. For the QTD, that’s +0.2% and +24bp respectively, while the monthly return sees losses of -0.2% and spreads wider by 21bp. These return numbers are no disaster when, say, put against the volatility of some equity indices. For comparison, the DAX is down almost 1% YTD, a whopping 13% QTD and 3% in the month so far. The numbers do hide some ills though. Benchmark players with a higher beta positioning (most of them) will be underperforming massively; auto positions will show severe weakness and the HY sector has been caught up in it, while doing little wrong. We’ve championed corporate bonds for years, believing that they have become a core asset class along with government bonds and equities, having exhibited exponential growth in volume in the crisis years. Their safe-haven status remains intact, though the bond market is not immune to event risk. I’m still with corporate bonds.

Some relief but no joy… The relief into last week’s slightly better close wasn’t of the ‘high-fiving’ sort and is likely a harbinger of how events might pan out this week and beyond. Equities in Europe might have got a fairly decent short covering-like bid behind them, but credit’s recovery was much more cautious. Interestingly, watching developments in the synthetic markets, while single names afflicted by the scandal and macro risks have gapped (VW, autos, Glencore, Anglo and so on), iTraxx index levels haven’t moved with the same voracity as equities. Not long ago, this level of equity volatility would have translated into much greater swings in the indices. Not now: pound-for-pound we’re seeing much-reduced volatility in the synthetic space.

Autos and basic resources lead credit weakness… So Friday’s picture was better but mixed, with hybrids lower on supply fears but VW’s hybrids bouncing a point or so; AT1/CoCo risk was priced higher on better equities by up to 75c and we saw other beaten-up paper marked better too, including LatAm risk. On the downside, Glencore and Anglo American took some punishment, with both some 50bp wider amid clear sellers, and little interest for the other side of the trade. The Swiss have temporarily banned the sale of VW cars impacted by the emissions tests, and we can expect more of this type of headline risk to keep VW spreads from staging any material recovery. Stay away. Overall it was a poor week for credit, with the iBoxx IG index out 10bp to B+161bp and the HY index at B+518bp (+33bp in the week). The two biggest losers were autos and basic resources, where the iBoxx sub-indices moved 55bp and 80bp wider in the week respectively. In primary, Campari’s deal got away, but the increased Eur600m deal was only 2x covered, priced with a 2.75% coupon for the unrated, HY implied-rated issuer.

On Sunday, the Catalan election saw the separatist “Junts Pel Si” group win an overall majority in Parliament which will now likely set off the process for  referendum (likely unofficial) on independence for the Catalonia region from Spain. More immediately, it’s going to stop the Bund-Bono spread from recovering. It’s up at 138bp in 10-years and the uncertainty that the election result brings will keep it elevated. Sub-100bp looks a tough ask at the moment. Elsewhere this week we have eurozone flash inflation numbers on Wednesday and September’s US non-farm payroll report to look forward to on Friday.

Have a good week.

25th September 2015

Where’s Hannibal… Smith

MARKET CLOSE:
FTSE 100
5,961, -71
DAX
9,427, -185
S&P 500
1,932, -7
iTraxx Main
86bp, +5bp
iTraxx X-Over Index
354bp, +17bp
10 Yr Bund
0.60%
iBoxx Corp IG
B+160bp, +3.3bp 
iBoxx Corp HY Index
B+517bp, +11bp
10 Yr US T-Bond
2.12%

It all started brightly… With a Norwegian rate cut followed by a Taiwanese one, VW stock higher and European equities firmly in the black – to coin the oft-used phrase made famous by the A-Team’s Hannibal Smith, “I love it when a plan comes together”. Except there was or is no plan. There was hope, which led to some short-covering and perhaps some misguided bottom-fishing for assets where beaten-up valuations in some places were too tempting to forego. Broadly though, credit didn’t really get sucked into that brighter open, with just a very tentative bid emerging. Our market moves too slowly for this to be the case – that’s fixed income for you. Now BMW looks like it might join VW in the doghouse, with reports suggesting it may have failed real-world road emissions tests. Its stock was 8% lower at one stage. Dare we suggest it, the manipulation theme is all over us, as seen in the skewing of valuations. Look at the deal from Unicredit today. We don’t often talk covered bonds, but their 5-year deal had an initial price talk at midswaps-9bp (+8bp premium) against the German Länder issue, which was also in the midswaps-9bp area on IPT. It’s no trick question but which has the better value – German mortgages (Unicredit/HVB) or German risk (Länder)? I think most would say the latter, but unfortunately the ECB doesn’t buy Länder. Unicredit got their Eur500m, at midswaps-9bp on a barely covered book of Eur550m.

Another day in the trenches… It all went awry very quickly after that promising open. Led by the headlines, then equities and then yuk. The synthetic indices came under the cosh, and BMW saw its 5-year CDS trade up at 150bp before settling at around 125bp (mid), with VW’s CDS around the 215bp area. Everything else was in defensive mode. And that means low flow, poor volumes, no liquidity and a primary market all but slammed shut. No one knows where this emissions story is going, but BP/Deepwater is likely going to look like a drop in the ocean, with the late 1980/90s tobacco lawsuits a more appropriate comparison. Still, the contagion impact is so wide and far-reaching that it doesn’t actually make much sense. Perhaps few really believed assets were fairly priced and piled in because that’s what everyone else was doing. If you can’t beat ’em, join ’em. It seems only the financial sector has been spared any pain. Anything non-financial in corporate bonds has suddenly become toxic. That ought not to be the case, but few are going to go against the tide into this maelstrom of uncertainty engulfing such an important industry group. So wider we go, while there is little activity (no swathes of sellers) to justify the extent of the weakness in corporate bond markets. Admittedly, the market (investor community) is just beginning to look a little scared, but there’s no panic yet – just a buyers’ strike.

And it’s miserable… A slew of weak US data (durable goods, unemployment applications and business investment) kept the reins on any chance the US might rally. Global and domestic growth concerns came to the fore. Another -1% move in the S&P, -2% for Germany’s  DAX, the FTSE back below 6,000 and oil futures lower again all made for miserable reading. At least US Treasuries were better bid, pushing the 10-year yield down to 2.12% (off the intra-day lows). The DAX is now down 3% YTD and the FTSE 8%. Credit took its cue from this and wider she went. Looking at it through the broader iBoxx IG corporate bond index, the punishment meted out saw the index up at a painful B+160bp (+3.3bp) with weakness everywhere – autos/hybrids and LatAm risk especially took a battering. Returns are creeping lower, now -1.4% YTD in IG. For HY, we took even more downside. The index widened by 11bp and returns YTD have dropped to just 0.25%. Oh dear.

Happy Friday and wishing you a stress-free weekend.

24th September 2015

Sea of heartache

MARKET CLOSE:
FTSE 100
6,032, +96
DAX
9,612, +42
S&P 500
1,939, -4
iTraxx Main
80bp, -1bp
iTraxx X-Over Index
332bp, -5bp
10 Yr Bund
0.59%
iBoxx Corp IG
B+156.7bp, +1bp 
iBoxx Corp HY Index
B+506bp, +5bp
10 Yr US T-Bond
2.15%

Pushing on a string… It’s an awful lot of cars – 11 million, and possibly more. But there is no global financial meltdown or systemic crisis, we are far from that situation. Yet the market’s reaction has been incredible on the potential for scandal to engulf most of, if not the entire, auto industry. Some of the pricing action we have seen has been almost Lehmanesque in its magnitude; the rhetoric certainly has been. The global banking system isn’t under scrutiny or impending collapse. A large part of the corporate sector might be. Should the markets be reacting this way? Monetary policy has not been tightened and likely will not be for a while. The liquidity tap is still open and could be opened further if needed. However, as well as the VW emissions scandal, all roads lead east, to China. Wednesday’s poor manufacturing data with activity at a 6.5-year low had stirred at the open. Commodities prices are going to stay low/go lower, and a swathe of industries are going to come under earnings pressure. The knock-on effect has seen Total, for example, announce that it would be cutting capex in light of an expected prolonged decline in oil prices. On Wednesday, markets opened weaker again but then managed a somewhat nervous bounce in a choppy session, most likely on the back of some short covering. Generally though, it feels as if the investor community is on edge, on tenterhooks, and anything that doesn’t fall into its nicely into its little place is a sign of impending disaster. There’s no middle ground, no sense of proportion. That’s what happens when it’s been too easy for too long. The ‘gimme’ trade is over. And because we have little real secondary market liquidity, any selling cares result in a disproportionate pricing action.

What’s normal anymore…? The above price action, thinking and skittishness has actually become the norm. It will take some getting used to, but it comes with being bailed out by the central banks, political interference in crisis leading to a poor regulatory response, and the ultimate resulting in the delay of the difficult decisions. For instance, the shock absorber which hitherto lessened the pain of any decent selling – the dealing desks – is no longer there to help lessen the blow in valuations when the market moves en masse in a particular direction. Less capital allocation afforded to that side of the business means that weaknesses will be exacerbated through valuations, as risk limits and positioning capabilities have been drastically reduced. It doesn’t help right now that we are also just a week away from quarter-end. Self (and performance) preservation has kicked in. Some upbeat headlines are needed – they might just save the day – otherwise expect a continued chipping away at prices with few likely going to step into the breach into month-end. Glorious October? Hmmm…

Calm returns, but it’s all very fragile… Rarely do we go up or down for a prolonged period in a straight line. Happily, Wednesday was the “let’s take a breather” day. And we did. European stocks were in the black, though into the close a weaker US market took the shine off the earlier, better intraday levels. In credit there was some price stability but hardly any recovery; the session ended leaving the broad measure of the corporate bond market – the IG iBoxx index – actually a basis point wider. Noise really given all we ave endured these past few sessions. VW paper found some stability (not necessarily a floor), its CDS level was barely improved though (5-year at 204bp, -7bp), but few were willing to step in given that tomorrow might bring another headline to take it all away again. The high yield market was also a little weaker and valuations here are beginning to look attractive. The new issue market was closed, with nothing on the screens in either financials or non-financials. This more stable session should not be seen as a turning point – far from it. We need a few more like it which also take in the VW situation and offer some further clarity on it. That, unfortunately, could be a long time coming.

On a housekeeping note, many thanks to you for your continuing support of this site.