13th November 2015

Credit and its predatory instincts

FTSE 100
6,179, -119
10,783, -125
S&P 500
2,046, -29
iTraxx Main
73bp, +1bp
iTraxx X-Over Index
306bp, +5bp
10 Yr Bund
iBoxx Corp IG
B+151.7bp, +1bp 
iBoxx Corp HY Index
B+475.6bp, +1bp
10 Yr US T-Bond

Holding patterns rarely welcome… One never welcomes being trapped in a holding pattern, but that is exactly what has happened this week in the markets. Equities have played out in a smallish range (+/-2%), government bond yields have had small ups and downs after more dramatic moves the previous week and corporate bond spreads have barely moved. That is not what we would have envisaged after the strong non-farm payroll number a week ago. And the UST/Bund spread has hit at a record 172bp, as we suggested it would. Issuance has underwhelmed too. Single-name newsflow has been light and mainly centred on poorer earnings, while the big story this autumn around Volkswagen has taken the customary course of titbits of additional revelations around the emissions scandal. Macro has always suggested that China will be a big factor in how we play out 2016 – without mentioning the rest of 2015 – and the data is suggesting that next year will be a difficult one for the global economy. The OECD said as much, after all! We are probably clutching at straws, but with Thanksgiving just a couple of weeks away, we can hope that we might see some greater activity into the traditional US November holiday. All things being told, the aforementioned apathy-like mood in the market has been with us a while, and we would not be surprised (unfortunately) to see it persist into year-end.

Newsflow picks up, but it’s mostly poor… Eurozone industrial production for September came in at a lower than expected -0.3%. We had a raft of earnings which missed and a couple of UK-based industrial giants warning on full-year earnings, those being BAe and Rolls Royce. Whatever the reason – Chinese slowdown most likely – commodities took a battering, with the likes of Glencore and BHP stocks down around 10%. Oil (Brent) dipped below $45 per barrel and WTI was under $42 as the oil glut showed no signs of abating. Draghi was on the tapes in as dovish a mood as ever, as he offered everything but gave nothing. Things are neatly falling into place – once again – for corporate bond investors for 2016, and we will discuss this as a theme on Monday.

That left credit in a world of its own, again… We had deals! Continental did a short-maturity 3.5-year at midswaps+55bp and raised Eur500m, while the UK’s Vodafone lifted Eur750m of 5-year funding at midswaps+70bp. Both deals were around 4x oversubscribed, and pricing on both rammed tighter. They were also trading 4bp or so tighter on the break, while the short WPP and AutoRoute from the other day were also performing;  the 7yr BMW from yesterday was 7bp wider. Anyway, the issues took the running total for the month to around Eur10.5bn. Other deals came in the financials sector, while German real estate group Alstria is likely due on Friday.

Rock-solid corporates except special cases… Interest rate concerns (in the US) and poorer economic data (elsewhere) kept equities in the red for most of the session. Dudley and Bullard, a couple of the Fed governors, were in hawkish mood (let’s hope they get on with it, so we can get on with it too), and that saw to it that the S&P would be under pressure, eventually closing out -1.4%. European equities closed up to 2% lower. Treasuries got a bid behind them, as did eurozone government bonds, with the 10-year UST yield dropping a little to 2.30% and the Bund yield lower at 0.61%. In corporate bonds, owning Glencore paper is becoming a real pain. For instance, the 21s were down 4.5 points in cash price at Eur76, or Z+610bp! Otherwise we were fairly firm, aside from those raw materials and oil names, and better across most other sectors and capital structures. The firmer tone in the cash market wasn’t reflected in the cash index, however, with the Markit iBoxx IG corporate index closing at B+151.7bp (+1bp) and the HY index at B+476bp (also +1bp). Main and X-Over were better bid (higher) into those weaker equities with the former at 73bp and the latter closing at 306bp.

It could be a difficult Friday. Have a restful weekend. Back Monday.

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.