18th September 2015

Can we get on with it now?

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

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.

Suki Mann

A 30+ year veteran of the European corporate bond markets and in his role as Credit Strategist, Dr Mann has been ranked number one in the Euromoney Investor Survey eight times in ten years. Previously with Societe Generale and UBS, he now shares views of events in the corporate bond market exclusively here on CreditMarketDaily.com.