Suki Mann

Author Archives: Suki Mann

23rd September 2015

The 500

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It’s been just over three weeks since the launch of Credit Market Daily, and the site has already racked up more than 10,000 page views. Plus, earlier today we welcomed our 500th subscriber to the daily email.  Initial expectations have been exceeded!

The readership has quickly become global, with the top 5 (of 56) visiting countries to date being the UK, US, France, Germany and Denmark.

Readers include the sell-side community, ratings agencies and a broad section of the asset management community across all asset classes.

A big thank you to all readers for the support so far, and to those of you who have made comments on the posts and/or voted in the market participant polls.  The more interactivity, the better!

Big Ideas

If there’s something extra that you’d like to see on the site, (maybe a user forum, some specific/regular polls, guest bloggers?) please get in touch using the contact form or leave a comment below – ideas are very welcome here.

23rd September 2015

VW: From Das Auto to Das Flouto

MARKET CLOSE:
FTSE 100
5,935, -173
DAX
9,571, -378
S&P 500
1,943, -24
iTraxx Main
81bp, +6bp
iTraxx X-Over Index
337bp, +20bp
10 Yr Bund
0.59%
iBoxx Corp IG
B+155.6bp, +6bp 
iBoxx Corp HY Index
B+501bp, +15bp
10 Yr US T-Bond
2.13%

Autos, the new banks… The climate lobby might be the only ones happy with the current situation around the Volkswagen emissions scandal. VW’s dabble with emission test results has cast a pall over the whole auto industry. Let’s hope there was no wider collusion and that this is confined largely to VW. At the moment there is some concern that other automakers might be involved, and certainly that is what some believe. An ‘asking questions later’ like trading mentality saw to it that German autos took 5%+ hits in their stock prices today, VW another near 20%! In credit, the auto sector is a core holding, albeit an underweight position for most asset managers given how expensive bonds are (have been) versus other sectors. But contagion has reared its ugly head – and pushed everything lower. The sector (including parts suppliers) represents a significant 9.2% of the iBoxx non-financial index and 5% of the overall index. That’s a meaty amount and, given the recent widening, represents a major hit on performance. For example, the IG auto sub-index spread moved a massive 20bp wider on Monday after the news broke, to B+161bp, and closed some 80bp wider than the tights we saw in early Q1. Today it moved another massive 35bp wider to B+196bp (+115bp off the tights). The auto sector’s returns now come in at -4% YTD against overall IG iBoxx index returns of -1.2%. We would be inclined to stay away for the moment: this could be nastier than BP/Deepwater. The price action has been severe. Admittedly, we are approaching quarter-end and that could have a bearing, but it’s not particularly orderly out there. And it is in non-financials where the hits are being taken, with little discrimination across names. The Street is playing it short too, not bidding for anything longer than, say, a 4-5 year maturity.

Selling into the developing black hole… The price action in Tuesday’s session was weaker than even Monday’s – and for the whole sector, as we suggested it might be. There was much contagion too, as we suggest above. Specifically, VW is a large capital markets borrower, and its cash bonds were 30bp+ weaker again; BMW and Daimler risk was also marked 10-15bp wider, while higher-beta Renault risk was 30-40bp weaker (and it barely sells a car in the US). VW’s 5-year CDS was up at 200bp (+65bp), with BMW and Daimler axed around the 100bp level. Markets have become very, very illiquid – as always in such situations – and some were (panic or no panic) selling auto and other risk into the black hole that seems to be developing. There was little or no short-covering, while few will be looking to bottom-fish here. Furthermore, however one slices and dices it, it is not looking good. VW’s paper occupies some 14% of the hybrid iBoxx index – it is the largest constituent of that index (with Eur7.5bn of hybrid bonds outstanding) – and the bonds were up to 8 points lower today, with smaller sizes going through the trading platforms versus Monday’s session. The VW 3.5% PerpNC15s, for example, were down at a cash price of Eur77 (Eur84 close Monday). Even paper from Robert Bosch, a leading supplier of parts to the auto industry, was under pressure. It’s tempting to believe that smaller-sized flows mean “retail selling’ but it’s more a case of “retail-sized selling” going on, given few in the Street are going to offer a decent bid here, especially on anything with size potentially behind it.

The price action feels like it is a systemic event… There is no systemic impact from this. The 10-year Bund yield closed at 59bp, -10bp! Stocks took a hit again, with the DAX down over 3% – led by those auto players – and now in clear negative territory YTD at 9,571 (9,805 start level). Others did not fare any better, with French autos seeing to it that the CAC was down a similar amount. The FTSE is down around 10% since the beginning of the year, and it seemed to pass us by that the UK’s budget deficit widened and factory orders fell. UK rate hike soon? No. It is a case of finding what else fits the story, and so commodities came back into the limelight – lower – and China was again being cited as a concern. And here, Glencore paper was back at the 2015 wides for example, with the 1.75% March 2025 issue at swaps+340bp (it has been 200bp tighter). At least Tsipras’s re-election in Greece was not being blamed. Back to credit, and the primary market in the non-financial corporate sector was a victim of the malaise, with no issuance in the session and Austria’s OMV pulling its upcoming hybrid deal due to adverse market conditions. The issuance that did come was from financials in CoCo format (HSBC), T2 (insurance) from ASR and some covered bonds.

For the record, the IG corporate bond index closed at B+156bp (+6bp) and the HY index at B+501bp (+15bp). Ouch. In the synthetic space, iTraxx Main S24 was at 81bp (+6bp) and X-Over at 337bp (+20bp). The 10-year Bund yield dropped to 0.59% (-10bp), the 2-year was at 27bp! And no sign of a systemic crisis. Have a good day…

22nd September 2015

Who’s been a naughty boy?

MARKET CLOSE:
FTSE 100
6,102, +5
DAX
9,949, +32
S&P 500
1,967, +9
iTraxx Main
77bp
iTraxx X-Over Index
310bp
10 Yr Bund
0.66%
iBoxx Corp IG
B+151bp, +2bp 
iBoxx Corp HY Index
B+486bp, +5bp
10 Yr US T-Bond
2.20%

Keep it clean, especially in the US… The US offers great opportunity and reward, but it is an unforgiving place for those in the corporate world who have done wrong. We can argue about proportionality, but like BP with its oil spill several years ago, Volkswagen is now going to feel the full force of the US’s way of punishing big business. Years of fiddling emissions tests will most likely see the company not only fined very heavily, but the financial hit is most likely going to lead to ratings downgrades and higher funding costs, perhaps a hit on sales, severe ongoing multi-year losses/earnings downgrades and some serious reputational damage (in the US anyway). More on this below. The eventual near 20% drop in VW’s share price was enough to see the DAX in the red (it recovered into the afternoon), while other bourses managed to regain some of Friday’s very heavy losses. This type of big corporate event risk is most unwelcome, to say the least. It’s already a damaged world, with the disjointed macro environment a big challenge for policy makers and investors alike. We’re nearing the end of the third quarter and it’s turning out to have been not just a difficult one, but a difficult year generally. And that after it all looked so good after Q1.

Softer again as iBoxx hits B+151bp… That IG corporate index spread level is newsworthy in itself for being a big figure, almost 60bp off the lows we saw in Q1 and a mark not seen for 20 months. Yet there’s hardly been a default this year to write home about, the corporate sector generally is plodding along and can finance itself easily, the demand for risk is clearly there, ratings have been steady – and yet we have edged wider most sessions over the past 6 months. It’s been like a form of Chinese water torture. If there’s any good news, IG returns have been consistently in the +/-1.5% area and have exhibited none of the big ups and downs of equities or the govie market (the DAX, +25.5% from January to mid-April 2015, is now down around 20% from that peak and just +1.5% YTD). If only we could get the timing right! Spread markets have nevertheless been victims of the contagion impact from other asset classes, hit hard by headline and macro risks. Still, it is fair to say, the corporate sector’s ability to service its obligations into the medium term remains intact.

Autos see to it that secondary markets feel the heat… VW cash moved 30-50bp wider, it’s CDS to 133bp/mid (+50bp) in a fairly frantic session, as traders looked to find a new level for it to settle at, and investors tried to hedge their risks. Some follow-through saw BMW and Daimler wider too, BMW’s 5-year CDS at 72bp and DAIGR at 65bp. VW’s corporate hybrids were lower too in cash-price terms, wider in spread by 75bp. The senior cash 2030s, issued in January at midswaps+65bp as we head into the peak of the market, were wider at Euribor+130bp for the 1.625% Eur1bn issue, or, in cash price terms, trading down at Eur88 versus a reoffer level of Eur99. Oops. VW paper isn’t yet a buy into this weakness given we are likely going to see much more volatility around the name as the US investigation goes on. Be patient, they will be. For those who hold it already, it’s a case of bearing the pain of the losses (lower marks) for now, and running the position unless eventually forced to sell if the ratings downgrade gets too severe for the portfolio holding (from single-A to triple-B, for example). That’s a more technical move, and seems unlikely given VW’s huge financial flexibility.

Primary not quite closed…. All that should have been enough to see off the primary market, but no. And it was high beta ‘stuff’ which dominated. The sole, unopposed non-financial borrower was Belgacom, now known as Proximus (A1/A), which managed to print a Eur500m deal at midswaps+97bp, halving the initial new issue premium to 12bp in the process on a decently covered (4.4x) book. Danish insurer Danica was in for T2 Solvency 2-compliant funding, with a 30nc10 transaction of Eur500m generating a book in excess of Eur1bn. Campari’s deal is this week’s business, with roadshows over and a 5-7 year maturity deal possible. HSBC was in with a high-trigger PNC8 AT1/CoCo.

Elsewhere, Greece has a new government – rather the previous one is back in. The iTraxx contracts rolled from Series 23 to Series 24, the new S24 index wider at 77bp for Main and 310bp for X-over.

21st September 2015

Bon Courage

MARKET CLOSE:
FTSE 100
6,104, -83
DAX
9,916, -313
S&P 500
1,958, -32
iTraxx Main
71bp, +1.5bp
iTraxx X-Over Index
322bp, +4bp
10 Yr Bund
0.66%
iBoxx Corp IG
B+149.8bp, +1bp 
iBoxx Corp HY Index
B+480.5bp, +7.5bp
10 Yr US T-Bond
2.13%

Certainty until 2016… Yellen said it, no? To paraphrase, as long as macroeconomics remain uncertain, as long we see little upside to inflation (and I suppose we can extrapolate that to the slow pace in US wage growth), the Fed isn’t going to move, even if the unemployment rate continues to fall. Unless, of course, she speaks with forked tongue. At this point we are unlikely to be wrong-footed come the October meeting, but the December one might need a little more thought. So it’s business as usual for a while. The shutters go up and we look forward to a decent run-in for credit into month/quarter-end, to hopefully recover some of the hitherto lost performance. Year and month to date, IG returns are -1.3% and +0.015% respectively. We look for some improvement on those numbers over the next week or so where the rally in the underlying will help all offset a little of the spread weakness if we get a deluge of supply, which might act as a brake on any material tightening in spreads. And it could be worse. After all, Germany’s DAX equity index was up 25% in April versus where it started the year. Oh, now it is close to being flat and was even negative YTD in that late August drubbing on Chinese devaluation fears.

Markets react as expected… Post-Fed, we saw a weaker dollar/stronger euro leading to European stocks pushing aggressively lower (top-line growth and export worries). US stocks were lower on those global growth concerns cited by the Fed. This could reverse quickly given the fickle nature of stock and FX markets, which more often than not play to the tune of the headlines. The Bund got a good bid behind it, which should be more structural, and rallied quite hard (10-year yield: -13bp); expectations and pressure are now growing on Draghi/ECB to supply additional stimulus. Index roll dynamics kept the iTraxx indices from following stocks like-for-like and they rose only moderately (better offered/weaker), while the cash corporate bond market was wider too (after a better open), but there was no disaster in it. After all, corporate bonds somewhere to park that cash – offering better yield from what has become something of a safe-haven-like asset class.

Fill your boots, but not with reckless abandon… We said in several commentaries last week that this was a good opportunity to add corporate bond risk. We still think so. Admittedly, when stocks are down by so much, when the headlines are difficult, when others are running for cover, then it becomes a tough ask. We’re always going to be wary of those weaknesses elsewhere and the contagion impact they might have on spread markets (lately added to by the huge supply). Supply dynamics being what they are, they are always a moving target. For sure, little or no money has left our market, we continue to have much sidelined cash and investors do want to add. The first few deals which come this week will be cheap – but they will need to perform. Any mushrooming confidence should see a better technical edge to the cash market as we ride out the third quarter and the run-in to year-end. So we would still stick with a higher-beta bias to the positioning, skewed towards lower IG paper, corporate hybrids, CoCos, double-B rated HY risk and solid single-Bs, and a bias in IG towards wearing some duration risk.

Where do we stand now?… Spreads as measured by the iBoxx IG index are at B+149.8bp, some 9.8bp wider than where we started the month. These are easily the wides of the year, and we last saw these levels just about two years ago. Since then the ECB has been in action, and yet we’ve given up 60bp from the tights we enjoyed in Q1/2015. In HY the index has widened by 12bp, and now also resides at the wides of the year at B+480.5bp and some 8bp wider in last Friday’s session. The day started well, but given how equities gave up, credit followed suit. Contagion has something to do with it. There were no new issues, as one would expect on Friday, and it will be a brave borrower that chances its arm on Monday – or a good syndicate desk that convinces one to bring a super cheap deal. More likely, the week will see us open in pensive mood, and we should expect a slow start. Still, it has been a heavy month and a heavy year on the supply front. Dialogic data has IG non-financial issuance at Eur27bn MTD and Eur213bn YTD. These are big numbers, but not record ones.

Late on Friday, France was downgraded to Aa2/stable by Moody’s, Syriza won the election in Greece – but it doesn’t matter as austerity and adherence to the eurozone bailout was always going to be implemented whichever party succeeded. There is a flurry of US data later this week ending with that US GDP number on Friday.

As Sergeant Esterhaus used to tell the guys after each morning roll call in Hill Street Blues, “Let’s be careful out there.”

Have a good week.

18th September 2015

Can we get on with it now?

MARKET CLOSE:
FTSE 100
6,187, -42
DAX
10,230, +2
S&P 500
1,990, -5
iTraxx Main
69bp, -2bp
iTraxx X-Over Index
316.5bp, -6bp
10 Yr Bund
0.78%
iBoxx Corp IG
B+149bp, unch 
iBoxx Corp HY Index
B+473bp, -1bp
10 Yr US T-Bond
2.19%

Oh what a night… Forgettable. But at least the Fed cares what is going on globally. And the picture isn’t great. Low inflation, weak wage growth and a slow recovery in the US more than offset the employment dynamic domestically. Elsewhere, China is in the doldrums, Europe is barely growing, there’s no inflation anywhere, and geopolitics are a serving up a huge curve ball leaving us with a picture which, overall, is bit of an Eton mess. So we maintain the status quo. No rate hike in the US, and I would think we will not get one in October either. Little will change. December’s meeting is too far away to care about, or to matter! The 10-year Treasury yield dropped to 2.20% (-8bp), equities got a lift; we will open in Europe slightly better bid today. We have never been faced with a global situation like this before: no growth, no inflation, disjointed global markets failing to be lifted out of their torpor by others in better shape, and yet a need for an ongoing manipulation of the markets by the central banks (low rates, QE etc).

But the show must go on… After all that, we can look forward to long weekend courtesy of the US Federal Reserve. But on Monday, it’s back to the business of investing. And nothing changes for the corporate bond market in Europe. We’re never completely immune to events in the US – or anywhere else for that matter – but the case for corporates in euros (and maybe in sterling) versus dollar-denominated ones, versus equities and against government bonds remains intact. For the former it is a simple relative value play in terms of absolute returns, where any rise in US Treasury yields will eat into performance while the ECB’s policy remains supportive for euro-denominated assets. Credit versus equities still works because we ought to still be in capital preservation mode. I want my money back! Granted, equities have had a flyer over the past few years, but credit has few of the stresses and strains that have gone hand-in-hand with that equity performance. Until we’re sure we have a sustainable growth trajectory, credit remains the asset class of choice. Versus govvies, well, we still need some yield and our money back at maturity, and current policy responses contrive to make the corporate bond market a safe-haven asset class. So stick with it.

Looking on the bright side of life… Thursday closed out in subdued fashion, with little movement anywhere and nothing on the new issue front to get excited about. Main was down at 69bp (-2bp) and X-Over at around 317bp (-6bp). Friday will be a more reflective day, and there’s a good chance that the primary sluice gates will open next week as relief sees banks pushing issuers to get deals done sooner rather than later. Oh, that October meeting beckons! iTraxx indices will be better offered, cash better bid, and we have several weeks of calm in which to get some risk on board and portfolios better rebalanced for the year-end – that is, to maintain that higher beta stance.

Have a reflective day and a super weekend.  To check out our recent poll results on the Fed rate decision, click here.

17th September 2015

September rate hike poll results

Market participants predicted the following result to the question:

 

An overwhelmingly large number of our readers got it right. 70%+ of you voted the same way as Fed – no hike. So, will you now be bullish risk assets and position accordingly? The next meeting is in October, and I for one do not think too much will change between now and then. The corporate bond market still retains it’s lure; there’s little or no money leaving it.

There are some good opportunities to add risk given the recent weakness; time to go shopping.

17th September 2015

Sock it to me

MARKET CLOSE:
FTSE 100
6,229, +92
DAX
10,188, +56
S&P 500
1,978, +25
iTraxx Main
70.5bp, +-2bp
iTraxx X-Over Index
324bp, -9bp
10 Yr Bund
0.77%
iBoxx Corp IG
B+148.3bp, -0.5bp 
iBoxx Corp HY Index
B+473.8bp, +2bp
10 Yr US T-Bond
2.29%

The 25bp isn’t the issue… What the subsequent communiqué dishes up will matter more. Still, it won’t mark the end of the multi-year halcyon period for the corporate bond market in Europe. We should be focused on the eurozone inflation figure, which came in lower than expectations at 0.1% for August – and we suspect more than a few corporate bond market investors were inwardly warmed by it. I know I was. That sort of figure suggests that the ECB has more work to do and that an extension of the current asset purchase programme in longevity and scope is a fait accompli. Treasury and Bund yields are most likely going to see more divergence should the Fed raise rates. The latter yields have been dragged higher in the last session or two as Treasuries sold off, but we suspect the link will become more tenuous into the next few months. And the need for yield in European fixed income means more demand for corporate bonds. The corporate market has become bit of a safe haven in the past few years, boosted by systemic liquidity creating an easier refinancing environment, and leaving a supportive rating transmission dynamic and extremely low default rates. The headlines in this low-growth era have been surprisingly kind to corporate bonds and will continue to be so as liquidity works its magic for a while longer. The persistent low-inflation environment also makes a folly of the past several months of weakness in corporate bond spreads, which have now hit 18-month wides. We are looking at a fantastic opportunity to add some cheaper risk here.

No longer a hidden subliminal message… August CPI fell in the US (-0.1%) and just adds to a myriad of indicators which are sending out contrasting signals. There is no, low or negative inflation, depending on which definition one chooses. We have tight labour markets in the US and UK, but sluggish wage growth. Nearly every month we are surprised by solid industrial production numbers from Germany. Now the OECD is downgrading its global growth figures. That concoction is such a mish-mash of ingredients that policymakers are having to contend with, it’s no small wonder that playing it safe with loose policy is seen by most as the best option. So get on with it, the message is hardly subliminal any more. Buy corporate bonds.

Closed for business on Thursday… We were effectively closed on Wednesday too, with nothing we could really get excited about on the primary front. LeasePlan was the closest we got to an IG non-financial corporate, and the most noticeable thing about the deal was the smaller coverage ratio (in the 2-3x range) for the Eur500m, 3-year offering. Low triple-B rated property group Akelius’ Residential rounded off this pre-Fed issue-fest with a Eur300m, 5-year transaction. There was the usual smattering of unexciting covered and senior deals, while the ESM took 10-year funding. S&P slipped in a one-notch downgrade of Japan’s sovereign rating to A+, bringing it to the same level as Moody’s rating (A1).

And the rest… On the surface we sat through a good session, as the markets were spurred on by a good ol’ rally in equities. Over 1% in most bourses saw to it that credit was going to better bid for choice. Nevertheless, the iTraxx indices were better offered, cash though recovered just a little of the recently lost ground but the crop of  ‘cheap’ deals in primary were on the front foot. Fickle, but then it always is. We’re probably done as far as the heavy lifting is concerned from a business perspective for this week. The Fed later will effectively leave us with a long weekend in which to ponder how we will close out the quarter and the year.

Our thanks to all those who voted in our Fed rate poll. Over 70% of respondents think that there will be no hike tonight.

16th September 2015

Rational exuberance to extreme caution

MARKET CLOSE:
FTSE 100
6,138, +53
DAX
10,188, +56
S&P 500
1,978, +25
iTraxx Main
72,5bp, +1bp
iTraxx X-Over Index
333bp, +5bp
10 Yr Bund
0.74%
iBoxx Corp IG
B+149bp, +1.5bp 
iBoxx Corp HY Index
B+475bp, unch
10 Yr US T-Bond
2.29%

Rational exuberance comes to an end… Nature abhors a vacuum, and the markets hate uncertainty. Chinese stocks went another 3-4% lower depending on the index, Asian equities followed suit, Europe and US equities are up – but only after US data saved the day, iTraxx index levels are a small up and cash credit spreads weaker for choice. The Fed has the market at its mercy, it would seem, and it all looks rather dramatic. We don’t think it ought to be. We know the Fed will move, if not on Thursday then most likely in October. Most are positioned accordingly, but it looks like the green light is needed before we can get on with it. Our website poll thus far has two-thirds of voters expecting no move this week. In the meantime, the market is acting as if it was caught in the headlights. Thank heavens a 25bp hike isn’t going to directly impact the European corporate bond market. In fact, it should make it relatively more attractive for absolute return funds, for example. Other asset classes might feel some heat as money is shifted from EM, some FX trades are unwound and US stocks perhaps come under pressure. But the spiral of contagion will not blow a hole in the corporate bond market here, just bring some weakness at most. Relax.

Extreme caution all of a sudden in primary… There’s money to put to work, but suddenly the markets have turned all skittish and are demanding more from borrowers. We suggested in yesterday’s comment that new issue premiums were on the up, that deals were failing to catch fire even so and that there has been too much issuance in too short a space of time. Theoretically, increasing those premiums ought to make deals a shoo-in, but that hasn’t been the case (with book sizes/coverage ratios still falling), and so the underperformance on the break is being driven by the current caution. Still, that didn’t stop mid-single-A rated DSM, which lobbed in a huge near-30bp NIP based on the initial price guidance for a 7-year, Eur500m no-grow transaction. The final pricing level, at midswaps+75bp, only saw the premium to fall to 20bp. That’s high for a low-beta industrial, especially taking into account that DSM was the sole non-financial corporate borrower in the market today and got away unopposed. In financials, the pick of the bunch was the AT1/CoCo deal from ABN, offering a final coupon of 5.75% for the Eur1bn-sized issue and where the book was a more glowing Eur3.5bn+.

Red turns to black on mixed US data… The equity markets in Europe languished until US retail spending registered a healthy rise in August, giving a fillip to most who chose to ignore the weaker manufacturing reports. The gains were picked up into the close, with most stock markets up by over 0.75% having been down by that much before. For credit we kind of followed suit, but corporate bond markets are lumbering in nature compared to their equity brethren. In the synthetic space, iTraxx Main was up a little at 72.5bp (+1.5bp) and X-Over at 333bp (+5bp). In cash, another weaker tone saw the iBoxx index close at B+149bp, some 1.5bp wider on the day and mainly on higher beta sectors under some pressure from Street marks rather than better sellers. Underlying yields have jumped higher (10-year Bund +9bp) and returns are going to look poorer.

Eurozone inflation data is out this morning.

15th September 2015

I don’t like Mondays

MARKET CLOSE:
FTSE 100
6,085, -33
DAX
10,131 +8
S&P 500
1,953, -8
iTraxx Main
72bp, +1bp
iTraxx X-Over Index
332bp, +4bp
10 Yr Bund
0.65%
iBoxx Corp IG
B+147bp, +1.5bp 
iBoxx Corp HY Index
B+476bp, +5bp
10 Yr US T-Bond
2.18%

A Monday before a crucial Fed meeting… And there’s not much to like about it. Just sitting around, waiting for something to happen – a new deal or two on the screens, perhaps even a client enquiry, but no real fresh, directional trade to put, on especially when the Fed decision on a rate move at this crucial juncture could go either way. The Chinese industrial output and fixed asset investment numbers out over the weekend were poor, leaving Chinese stocks to fall by almost 3%, but bourses in Europe were unperturbed by the drop. That would not have been the case – and wasn’t the case – a couple of weeks ago. Maybe it’s because it has happened so often, that the “boy who cried wolf” syndrome has hardened us to big moves in Asian stocks. Still, the weaker numbers point to lower demand as the Chinese economy goes through what will be a prolonged and painful rebalancing, which in turn means low(er) commodity prices for longer, and reduced consumer demand and the like for an extended period. It leaves Wednesday eurozone inflation figures likely to be anchored around zero, with little or no hope of a pick-up anytime soon. That means markets expect that more QE is on the horizon and further easier policy will give equity markets a boost. That rising tide lifts all boats. Easy really. We got our fill in primary, as we suggested we might in our previous postings. Statkraft, Pentair, a three-tranche deal from Sanofi and Pernod Ricard all kept the market focused. The downside at this moment is that building a ‘decent’ book is becoming bit of a struggle (see below).

New issue coverage ratios fall, NIPs on the up and performance wanes… In primary, Norway’s Statkraft raised Eur500m at midswaps+85bp in 8-year funding (book just over 2x, NIP of around 15bp) and Pernod Ricard (Baa3/BBB-) lifted the same amount in the same maturity. Sanofi became the latest of a growing number of entities doing three-tranche deals (one being a floater). Commerzbank was in for 7-year maturity senior fixed funding and BPIM was on the screens for a 3-year. The books on the deals are now falling into the 2-3x category rather than 4-5x or more while new issue premiums are also on the rise, which suggests a bit of indigestion (it has been a very heavy couple of weeks) or caution about adding pre-Fed. It doesn’t help that last week’s new deals have come off a little too (ITV +10bp), with few stepping into the breach to lift the cheaper offerings in secondary. As for ProSiebenSat, the media group pulled its deal following the investor call last week, and it seems the market won’t take down anything that is thrown at it after all.

Elsewhere, we fail to lift off… The synthetic indices played out in a narrow range and ended better bid (higher), while cash corporate bond also languished, not helped as the session progressed by the weaker performance in the equity markets. Most of Europe ended 0.5% or more in the red, the DAX being the exception as it closed flat on the session. The US was trading lower too into the European close, seeing to it that there would be no late recovery. September has been a quite horrible month for corporate bond valuations. The iBoxx IG corporate cash index was again higher into Monday’s close, this time at B+147.3bp or 1.5bp wider in the session, with the HY index also giving up ground to B+476bp (+5bp). The IG index level was last seen in October 2013! Yet, we have no corporate bond crisis – far from it. The weakness was clear everywhere with few stepping in, as mentioned above. Hybrids and CoCos took it on the chin. For HY, we’re just a basis point off the widest index level this year. And finally, for the synthetic indices, Main was up at 72bp (+1bp) and X-over weaker at 332bp (+4bp).

Don’t forget to cast your vote in the Fed ‘rate hike poll’. As it stands, the ‘no rate hike’ camp are in the ascendancy.

14th September 2015

Fed up? The wait’s nearly over

MARKET CLOSE:
FTSE 100
6,118, -38
DAX
10,124, -87
S&P 500
1,961, +9
iTraxx Main
71bp
iTraxx X-Over Index
328bp
10 Yr Bund
0.65%
iBoxx Corp IG
B+145.7bp, +2bp 
iBoxx Corp HY Index
B+471bp, +4bp
10 Yr US T-Bond
2.19%

All eyes on the Federal Reserve… The US interest rate decision can’t come fast enough. Many ought to be put out of their misery, one way or another. We’ve been on tenterhooks long enough and the market will be tetchy into it, hopefully relieved after. That’s how it usually plays out – and it probably will again. And that’s because whatever the Fed does, it will most likely be a damp squib, with most of the worrying over and positioning already in place. If it raises, we will likely get a bit of volatility into the end of the week, with some more pondering as to what this might mean for EM, FX markets, equity valuations, US-versus-eurozone asset performance and so on. If it doesn’t, we will still get something of a wobble as we all consider whether it will do it ‘next time’, and give some thought to the idea that the Fed might be behind the curve and need to raise in October or December (perhaps more than 25bp). But once the thinking, writing, comments are all done, we will settle and probably trade higher in most asset classes. Much ado about nothing, so to say. True to form, we closed out Friday with these worries ensuring all erred on the side of caution. Oil futures fell, thought was given to China’s busy weekend of data releases, equities trended lower in Europe, govvies got a better bid and credit was weaker by some margin. Still, we should not be surprised by the market reaction, and for credit it wasn’t a big deal. After all, a couple of borrowers chanced their arms on Friday and got deals away ahead of what could be a busy opening couple of sessions into the Fed’s get-together.

Thank goodness for the primary markets… Because the corporate bond market would be a morose place if the window for issuance was closed: secondary markets are not exactly chock-a-block with liquidity, activity or decent volume. The week just gone was a very good one, with issuance levels higher than most could have reasonably anticipated. According to Dealogic data, Eur206bn has been raised by IG non-financial corporates so far this year (Eur282bn is the record for any given year), and the Eur14bn last week alone makes it the third-best week of 2015, the other two coming back in that mid-Q1 period. On Friday, low triple-B rated ITV slipped in with a Eur650m, 7-year transaction at midswaps+162bp. Italy’s A3/A- rated Eni paid up for 8-year funding at midswaps+105bp, offering a decent 10-15bp new issue premium which was necessary given the weakness in the market in the session and a not so impressive order book of below Eur1.5bn. A quieter period now wouldn’t come amiss, helping us all properly digest last week’s deluge and leaving us to focus on the post-Fed dynamics.

Taking stock with two weeks to go to quarter-end… And corporate bonds are having bit of a soggy time of it lately. IG corporate spreads as measured by the iBoxx index closed out up at B+145.7bp, or +3bp on the week and +2bp in the day. We are creeping higher at the moment, and it doesn’t make for good viewing given that the current index level is some 51bp higher than the Q1 tights. YTD IG returns are now at -1%. That’s not panic, it’s just some repricing in the face of the huge supply. Interest in paper is as strong as ever, witnessed through the demand we are seeing for new issues and the lack of any noticeable outflows from corporate bond funds in Europe. We continue to believe that if pockets of liquidity emerge in fancied bonds, then this is a buying opportunity. In HY, we closed out at B+471bp, +4bp in the session and on the week. The consistent edging wider means we are now just 7bp off the August wides. And it makes for bad viewing that the current HY index level is 100bp off the year’s tightest mark. Returns are up at +1.5% YTD though, which soothes much of the pain. We explain some of the weakness in IG spreads as a repricing impact coming from the fall in stock markets, with returns hit by the rising yield environment given that the underlying has backed up considerably. Copious supply levels of late have also had an impact, but this usually has only a short-term effect on spreads and we think it will blow over as soon as we get several quieter sessions, leaving secondary markets to recover. We have previously forecast that IG spreads can get into the B+120bp area – that’s not impossible into what is usually a decent quarter for the markets through Q4.

And finally, the UK Labour Party has a new left-wing leader, and Chinese data missed on many fronts with fixed-asset investment, factory output and growth in real estate investment all coming in lower than expected. Eurozone inflation (or the lack of it) is out on Wednesday. A weak(er) number and the market will expect an additional policy response from the ECB.

Have a good day.