31st October 2016

Don’t let the sun go down

FTSE 100
6,996, +10
10,696, -21
S&P 500
2,126, -7
iTraxx Main
73bp, +1.5bp
iTraxx X-Over Index
330bp, +7bp
10 Yr Bund
0.16%, unchanged
iBoxx Corp IG
B+121bp, 0.25bp 
iBoxx Corp HY Index
B+407bp, +5bp
10 Yr US T-Bond
1.84%, -1bp

High yield stands alone…

The glut of primary issuance last week ought to have been the big talking point, but instead we are looking back at a performance-destroying week as we close out month ten of twelve. So near to that finishing line, but it looks like we are willing the government bond markets to sell off some more as overly long duration positioning gets a beating. With it, fixed income returns have been attacked. Investment grade corporate bonds, as measured by the Market iBoxx index have seen them fall to 5% YTD. IG spreads in the month have tightened 5bp (Markit iBoxx index) while returns for October have come in at -0.8% with the index yield up 15bp.

The shorter-duration high yield market has fared much, much better. Returns for the month are up 1%, index spreads have tightened by an astounding 36bp, the index yield has dropped 20bp and, for the year-to-date, high yield corporate bonds return 7.8%. Stunning. Sterling corporate bonds lost 3.4% in October, spreads on the index have tightened by 4bp, but the sterling corporate bond index yield has risen 44bp (blame it on Gilts). Returns year-to-date are at 10.5% versus over 17% in the 8-months to the end of August. The Gilt sell-off has ravaged those unlikely highs we saw back in the summer.

The year’s performance is now going to depend on duration product. We think credit spreads will hold out into year-end, with support afforded to them from the ECB/BoE QE programmes. As for market yields, the US election, the next Fed meeting (Wednesday) and the incoming data over November especially is going to determine whether IG returns are in the 4%-handle complex or 6%+, while HY should see out a 7-8%-like complex as front end yields will move relatively little. As for sterling, the Gilt story for now looks over as the incoming economic data has been much firmer than expected. We might have to wait until Q1 in 2017 before the data – if at all – starts to show worrying signs of a deterioration again. 9%+ for sterling corporate bonds in total returns would be a tremendous result in the Brexit year.

Primary keeps on going

€500m issues from TVO & Whirlpool

TVO & Whirlpool spun up €1bn between them

We closed out last week with a flurry of issuance. For investment grade/X-Over non-financial credit, we had Finnish power group TVO (€500m) and Whirlpool (also €500m) adding €1bn to the monthly total and taking it to €26bn with today’s session left. National Express finally took £400m from the sterling IG market.

In HY, Owens-Illinois issued a smaller than initially marketed €500m (and at a higher yield) and Wind Hellas €250m while in sterling, we had AMC Entertainment issuing £250m with “Together” selling £220m in a rare PIK Toggle note format. Fidelity International came up for the financials sector with a €400m senior transaction. Senior bank debt issuance comes in at €11bn for October.

So with today left – and there quite likely will be some issuance, we have €26bn from the IG market for October, with almost €14bn of that coming last week alone. In euro-denominated high yield, the month delivered €3.5bn of issuance with €1.95bn gracing investors last week from five borrowers.

There is some upward momentum and a ‘feel-good’ has been generated despite the weakness in government bonds and volatility in stocks. They have failed to dent spread markets (although turnover and volume have been light) while issuance has actually revved up into it with demand remaining solid. A couple deals have been pulled, but that’s always a healthy a sign as it shows that we aren’t funding everything that moves.

Drab session closes the week

The markets hardly reacted to "email-gate"

US markets barely reacted to more “Emailgate” news

From a trading perspective, the markets had a tired and/or month-end feel to them. For the second session running into the end of last week, equities barely moved out of the narrowest of trading ranges, and even murmurs around another FBI investigation into Hillary Clinton’s emails failed to see a meaningful push lower into the close in the US.

In government bonds, the Gilt market and the quality-end of the Eurozone closed unchanged; but the periphery sold off some more with BTPs in 10-years yielding 1.58% (+5.5bp) and Spanish Bonos 1.23% (+3.5bp) and these were notable under-performers. US Treasury yield declined a basis point, unmoved by the Clinton news and not really reacting to the very strong GDP data where the US economy grew by 2.9% (annualised) in Q3. December rate hike? Almost certainly.

In credit, the market closed unchanged to a tad wider in IG, with the Markit iBoxx index spread left at B+121bp (+0.25bp). It seems as if we saved the best until last, as that was the first session this month where spreads widened! And it was the same dynamic in high yield where spreads as measure by the index widened by 5bp to B+407bp. Not to be left out, sterling markets did the same, with 0.25bp of weakness for the iBoxx cash index. All noise, really, with likely a little month-end positioning motivation some of the weakness. Monday will be interesting in that respect, with the ECB due to report its latest corporate bond haul.

The iTraxx indices closed better bid (higher) with Main up at 73bp and X-Over at 330bp. On the month, they closed out unchanged, playing out in a fairly narrow range between 70-73bp on Main and 319-333bp on X-Over.

Next week is packed, in a way, but ought to see us through with little altercation. The Fed should stay sidelined on rates (their meeting is on Wednesday), the BoE isn’t likely going to change much either (Thursday) while the US jobs report (non-farm payrolls, Friday) comes too late to influence any Fed decision. For that, we wait until September.

Have a spookily good day. We will be 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.