25th November 2015

Complacency and market liquidity

FTSE 100
6,277, -28
10,934, -158
S&P 500
2,089, +3
iTraxx Main
72.5bp, +1.5bp
iTraxx X-Over Index
301bp, +5bp
10 Yr Bund
iBoxx Corp IG
B+151.7bp, +0.3bp 
iBoxx Corp HY Index
B+478bp, +3bp
10 Yr US T-Bond

Staying with the secondary market (il)liquidity debate… Can market liquidity return, naturally – of its ‘own’ accord, almost – following a market correction? We at least are not going to be complacent enough to think it can or will. The large bond market players are currently scurrying around, entrenched deep in thought, trying to find that source of secondary market liquidity as they have much to lose should there be a severe market correction. Saving their skin, so to say – and they have plenty of it in the game. Like others, they might manage to find it in limited situations, but the pain will be great when it comes – and for everyone. A change in the regulatory regime – allowing banks leeway regarding capital allocation for risk positions – is not going to happen. This is politically a no-go area. And therein lies the difficulty. Who will provide it? And the answer is: we don’t know. The European bond market for one lacks the homogeneity of the US market – legal, jurisdictional, documentational and so on. There is also great suspicion between asset managers and much apprehension with respect to exposing positions, strategies and the like, which would give others insight into how they operate. Market suspicion and self-interest are why inter-buy-side platforms always seem to fail. The European corporate bond market is huge – over Eur2trn in corporate bonds outstanding – but every aspect of it is highly fragmented. Following a crisis, there might be bonds flying around as desperate selling to free up cash to fund outflows begets more desperate selling. And there will be value and we suppose ‘liquidity’, but once the market settles, we will be back to square one. We agree that the central banks might be able to limit valuation downside in extremis, but anyone who suggests that central banks can (or ought to) replace the natural order of the market is not understanding the debate or the market function at all. And again, is likely talking self-interest.

Macro takes a back seat to geopolitics… The downed Russian jet allegedly in Turkish airspace saw to it that we had bit of a nervous session on Tuesday. There was only moderate flight-to-quality and admittedly stocks took bit of a hit, but the market reaction was very measured overall. Probably because more generally, the Russians have been brought into the ‘fold’ following the Paris terrorist attacks, and the view might be that the fall-out from this incident will be limited. Whatever, European stocks were down 1.5-2%, and government bonds got a boost and were bid up. The 10-year Bund yield was down at 50bp and the 2-year saw a new record low of -0.41%. They all pulled back into the close with stocks down just 0.5% and bond yields heading a touch higher off those earlier lows. Credit was unchanged to perhaps a little softer, but that goes with the territory, while VW related news – which was not good – keeps on flowing.

Primary subdued… SKF’s deal, flagged yesterday, was out, with a Eur500m, 7-year transaction at midswaps+122bp off a 4x oversubscribed book. Most of the other deals were in the covered bonds area, while BMW opted for a 6-year sterling issue. In secondary, we encountered a dull session. The broader index saw to it that spreads edged a tad wider for choice. The Markit iBoxx IG corporate cash index was up a touch at B+151.7bp, and that sub-150bp seems so elusive right now. The Hy index was a little weaker at B+478bp, in a moderate weakness to be expected given the sell-off in stocks. For the synthetics, we had Main at 72.5bp and X-Over also better bid, up at 301bp.

It’s the day before the day before Black Friday. Can we expect a plethora of deals? It would be nice, but unlikely – and there will be no bargains. Have a good Wednesday.

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.