13th October 2016

Cleansing one’s soul

FTSE 100
7,024, +47
10.523, -54
S&P 500
2,139, +2
iTraxx Main
74.5bp, unchanged
iTraxx X-Over Index
335bp, unchanged
10 Yr Bund
+0.06%, +4bp
iBoxx Corp IG
B+124.4bp, -0.2bp 
iBoxx Corp HY Index
B+427.25bp, -1.5bp
10 Yr US T-Bond
1.79%, +2bp

Beaten up as markets retreat…

Federal Reserve

Federal Reserve rate rise speculation abounds.

We are in that strange period where a bit of self-flagellation is the order of the day to help rid us of our demons. But why we are beating ourselves up? It seems so unnecessary. Macro has been accommodative with a bunch of recent releases in the Eurozone pointing to the potential for a floor to have been established amidst the most fragile of recoveries.

All the old excuses come back into the mind when we are in this mood. Brexit consequences are exaggerated (because they can). The Fed – just a week ago looking like deferring a rate rise to December – are thought suddenly to be odds-on for one in November (so what?). At least taper tantrum worries have been put to one side, although the after-effects of that “rumour” linger with government bond yields at close to recent highs. Then we have the Deutsche Bank story which for now seems to have got lost in the “other” news flow, where the US earnings season starts to take precedence. We’re sure it is only a matter of time before Deutsche Bank returns to hog the headlines!

The “feeling sorry for ourselves” theme was running through all markets in the session. Government bond markets continued their retreat with Gilts feeling a little hotter under the collar than most. The 10-year Gilt yield was up at a heady post-Brexit high of 1.05% and almost 8bp higher in the session at one stage – to close 6.5bp higher at 1.04%, while the equivalent Bund was yielding 0.06%p (+4bp). These are big moves and reflected across the curves meaning that total returns in the credit space will have declined as performance is eaten away by the rise in the underlying yield and not compensated for in any meaningful spread performance (yet).

The periphery didn’t necessarily underperform either, with yields for BTPs 4bp higher, leaving the 10-year to give 1.42% and the 10-year Bono 1.06% (+5bp) while Portuguese debt – in the ascendancy of late – saw 10-year yields back up to 3.38% (+3bp). That suggests to us that overly-long duration positions in safe havens were being unwound.

Equities had a down day, but the weakness was moderate and seemed like a catch-up trade to additional weakness the previous night in the US after we closed out here. They’re a little directionless at the moment, no doubt nervous on how the US earnings season might pan out amid heightening chatter around a possible Fed hike in November (and not December as previously thought). The session traded in a narrow range for European stocks throughout and finally up to 0.5% weaker.

Oil was off, amid reports about record production and the difficulties around containing and curbing global oil production. While the headlines can sometimes appear alarmist, the price per barrel for both WTI and Brent seemed to be holding above $50 with not too much difficulty amid moves of +/-2% intraday more generally. Where we did see more pricing choppiness was around sterling – as “seasoned, rational” traders hang on to every word uttered by Prime Minister May. The day’s range took in two cents – as high as $1.2325 and low as $1.2016, before closing in a low $1.22 complex.

Credit market issuance dominated by FIG

@ year tranche from Westpac

Westpac: 2-tranche €1.5bn deal

Nothing from IG non-financials here as we  drew an unexpected blank. It’s been a case of “fits and starts” for the non-financial market for a while now. The non-financial market’s supply came from HY entities where RCS & RDS sold €350m and Tereos was tapping its 2023s for a further €150-200m.

Financials dominated the day. Westpac priced a 2-tranche deal for €1.5bn in senior, Close Brothers took €250m in a 10-year maturity while CNP Assurances sold €1bn of Tier 3 notes. The pipeline of deals continues to grow especially with high yield borrowers, although Eurofins Scientific removed itself having decided not to proceed with a possible offering.

In secondary credit, we ended the session a tad better bid for choice, and as measure by the Markit iBoxx index we closed at B+124.4bp (-0.02bp). This is good news! We’re not exhibiting the volatility besetting equities and govies, having a limited, illiquid market likely become quite technical amid the heavy lifting and manipulative force of the ECB – finally. Returns are on the decline though given the sell-off in the underlying.

All the fuss and speculation around Brexit, the UK generally, sterling and Gilts failed to feed through into weaker sterling-denominated corporate bonds where the market closed unchanged. The cash index at G+156bp is still more than 30bp tighter YTD but 20bp wider than the lows seen in the aftermath of the BoE QE announcement. Returns for sterling IG credit (index) have declined to 11.5% YTD from highs of 17.2% – but this market’s performance is still well ahead of all others.

The better tone for credit, admittedly amid limited turnover and volumes, was also apparent in the high yield sector where spreads also were better bid for choice. Overall, for the moment, the corporate bond market is coming out top of the risk asset pile. The iTraxx indices closed unchanged with Main at 74.5bp and X-Over at 335bp.

That’s it. Have a good day. Back tomorrow.

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.