26th February 2016

Farewell to fraught February

FTSE 100
6,013, +145
9,331, +164
S&P 500
1,952, +22
iTraxx Main
109bp, -2bp
iTraxx X-Over Index
439bp, -4bp
10 Yr Bund
0.14%, -2bp
iBoxx Corp IG
B+186bp, unch 
iBoxx Corp HY Index
B+644bp, +7bp
10 Yr US T-Bond
1.70%, -4.5bp

An injection of faith… We’re back squarely to stimulus and the thinking is that we are odds-on nailed on that it is coming. There was no other reason to rally in Thursday’s session. January’s eurozone inflation print was higher YOY but missed expectations and at a lowly 0.3% isn’t going to see the 2% target level for a good few years yet. They are going to announce additional measures. PMIs, confidence, industrial orders and so on have all been fairly consistent in suggesting that the outlook near and medium term is worsening. We know the politicians won’t act/can’t act, so the ECB needs to step up to the plate. We’re sure it will. At least we are of the view they will give the markets a little and leave us clamouring for more. There’s a good chance therefore that the next 2 weeks, into that meeting, might just keep the markets buoyed and help those month-end valuations a little. Every little counts at the moment. In the news, Lloyds Bank’s results were good, BT survived another Ofcom review, while BAT and RSA earnings reports were upbeat. Oil prices were in the red for the session and Chinese stocks lost around 6% – and we seem to have passed the point we we care. There was a time, not so long ago, that we would have sold off hard on that. Stocks were higher, with index gains of around 2%. Synthetic spreads moved lower in response – a little, while cash credit was not impressed. There is no doubt that much month-end “stuff” is going on (portfolio rebalancing), with some thought also going into positioning pre-ECB and into that vital March month that promises to see out one of the most incredible quarters of the past several years.

Choppy week ending on a high… It is almost expected now that we can’t have a prolonged period of calm. There was hope that this week would have brought that, but we did have a couple of very difficult sessions, which should not be forgotten as we likely close out on a positive note. The end-of-February performance marks will be going in today and Monday (we will update on Monday), but the month has seen IG credit total returns (Markit iBoxx index) at just +0.1%, or +0.4% YTD. Spreads in IG are 30bp wider since the beginning of the year. That’s not great in isolation, but it is fantastic all things considered. After all, the DAX is down 5% in February or 11% YTD and equities (and oil) have given us much more anxiety than corporate bonds. For eurozone government bonds, that’s total returns of +0.9% in February and +2.2% since the start of 2016!

And the rest… There was no corporate bond issuance in IG. UBS printed a senior deal – the only such deal this week. We had the usual smattering of covered bonds and SSA transactions. Friday usually brings a lull in issuance while Monday might be laboured due to those end of month dynamics (doesn’t have to be the case). The cash market did little, unchanged in IG and wider in HY, for choice. Even the indices only moved moderately lower with iTraxx Main at 109bp (-2bp) and X-Over at 439bp (-4bp).

Happy Friday, have a good 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.