23rd November 2015

Ganging up on the hawks

FTSE 100
6,335, +5
11,120, +34
S&P 500
2,089, +8
iTraxx Main
iTraxx X-Over Index
10 Yr Bund
iBoxx Corp IG
B+152.1bp, -0.25bp 
iBoxx Corp HY Index
B+475.6bp, 2.5bp
10 Yr US T-Bond

Red corner or blue corner?… Draghi and Praet versus Weidmann. The Bundesbank’s Weidmann was in typical defiant, hawkish mode on Friday as he pretty much contradicted Draghi and the ECB chief economist’s more dovish stances. Weidmann’s defiance took in the declining oil price and the stimulus to consumption it might provide to the level of core inflation and the definition of medium term. He prefers to sit and wait… and wait. We would think that the red corner will be the winner, and do look for further easing measures to be announced in a couple of weeks’ time. The market believes the same, with the 2-year Bund yield closing at a new record low of -0.40% and the 10-year edging lower to 0.47%, before closing at 48bp. It’s time for the ECB to get off the fence. Allied with the market’s acceptance now that the Fed will raise rates – and with risk assets now in rally mode – we now think that this current better sentiment will see us through to year-end and beyond. Issuers have finally been released from their (self-imposed) shackles and rising stocks will see dealers increasingly reluctant to lose paper as the rising tide of the risk-on trade carries spreads tighter. Finally, we might finally see the Markit iBoxx IG corporate index break through B+150bp – a level it has flirted with for several weeks.

Friday’s deal flow completes an ‘OK’ week for primary… Mercialys (tap), Viesgo (8-year), Elia Systems (8.5-year) and Priceline (7-year) printed Eur2bn on Friday to round off the week and take the IG non-financial deal total for the month to a respectable Eur18bn. With just under a couple of weeks still to go, Eur25bn is still possible. It could be more, but the deal flow just seems to be stop-go for some reason. In financials, BPCE funded in a 12NC7 T2 format for Eur750m at midswaps+237bp, rounding off a decent week of subordinated issuance from the banking sector. We ought to expect issuance levels to pick up in Europe and continue well past the Thanksgiving break (in the US) next week. There are a good three weeks of business still left in this year.

Secondary stable amid primary focus… At least the focus on supply isn’t putting any pressure on the level of the secondary market. The Markit iBoxx IG corporate bond index closed the week at B+152bp, pretty much unchanged for the week and just a paltry 2bp tighter in the month so far (but a whopping 41bp wider YTD). That’s not great to say the least, but the rally in the Bund has helped returns perk up, with credit now showing a loss of just -0.1% YTD on a total return basis. Easily in positive territory on a total return basis is the HY market (around 3%), but spreads here are just 7.5bp tighter in the month. And all that is after some good rallies in the equity markets. It seems that the rise in stocks has only managed to steady the “credit ship” after the carnage at VW and Glencore/Anglo American, while liquidity is about the worst it has ever been in the secondary corporate bond market. It’s just as well that the rotation trade (credit to equity) isn’t going to come any time soon. The driver for that would be sustainable global growth boosting equities, leaving investors to chase capital appreciation strategies rather than the current preservation ones.

No closing for European credit into Thanksgiving… We expect the market in Europe to continue business as usual through the Thursday holiday in the US. Black Friday it will be on the shopping trail, and it would be useful if some of the investor community did their own shopping in the corporate bond market. With spreads going to be tighter by 5-10bp by the time the year is out, in our view time is fast running out to get some paper on board at these better levels.

Have a super week, really.

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.