29th March 2016

Corporate bonds – the comeback kid

FTSE 100
6,106, -93
9,851, -172
S&P 500
2,037, +1
iTraxx Main
76bp, +2bp
iTraxx X-Over Index
320bp, +11bp
10 Yr Bund
0.18%, -2bp
iBoxx Corp IG
B+154.4bp, +0.5bp 
iBoxx Corp HY Index
B+537.8bp, +2bp
10 Yr US T-Bond
1.88%, -2bp

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First quarter blushes spared…

Whatever happens between now and the close of business on Thursday, it will unlikely derail the remarkable market recovery of late that has touched just about all asset classes. And that is after what can only be described as a fairly tumultuous opening couple of months of the year which exhibited much volatility and asset price destruction, morphing into a stellar recovery following that mid-March ECB meeting. Amongst others, it has seen equities higher and off double-digit percentage lows in that period, oil prices better and having looked at and expected $20 per barrel we now reside – comfortably – at $40. With it, the US shale gas rig count has plummeted such that there are now 75% less rigs in operation since we peaked in October 2014!

Corporate bond spreads, 30% wider on an index basis at the end of February, are now flat YTD. Total returns for all except the safest of low yielding assets – government bonds – once all deep in the red, are now mostly in the black. And much of it is all courtesy of the ECB. After the latest in a long line of fixes (not repairs!) for the market with announcement more QE, the ECB has managed to steer the risk asset juggernaut back on to the straight and narrow. Don’t believe we’re not close to the edge though, we still are.

The market has just chosen to look on the bright side. And we – in the credit markets anyway, will soon receive another boost. That will come in later Q2 when we get details as to how, what and when the ECB’s asset purchase programme will dabble, or otherwise, in the corporate bond market. ECBUntil then, we have already reverted to a slow grind tighter in spreads and the focus has been on the new issue market. We think investor strategies will necessarily need to be more aggressive (greater risk taken on board) as the biggest buyer in town readies its shopping trolley. The compression trade will mean taking on a greater credit duration positioning and a move into lower rated bonds – be they in IG or HY, just to get that incremental yield/spread/performance boost.

Return profiles… the good and bad YTD 2016

It looks fantastic for corporate bonds

With three sessions to go before we close out an eventful quarter, the aim will be to preserve performance and get into position for that second one. Who would have thought the IG corporate credit would have returned a touch over 2% in this first quarter? It has! The ECB’s buying power and potential grabfest to come have total returns for the full-year of 4% as a real possibility. That is incredible. And the recovery has been witnessed across the board.

In high yield, the Markit iBoxx index is now returning +1.3% YTD having been down 3.3% in the period to mid-February. In relative terms, the FTSE has been down 12%, and is now down 2.1% while for the DAX that’s -18.6% and -8.5%, respectively. The S&P index saw a low of 11.5% YTD on 11 Feb before closing out before Easter just 0.4% down for the year (see chart). Oil has seen the biggest swing with Brent, for example, down 32% at its 2016 low and almost 10% higher now. As for the overall winner, it has to be the eurozone’s government bond market where returns have stayed positive all year. They might not be returning the 10% that we see for oil currently, but the eurozone’s government bond market has displayed little of the edge-of-the-seat price swings seen in oil markets and, in our view, deserve to sit at the top of the pile – recording some +2.65% of performance YTD.

IG non-financial issuance record there to be broken

A reminder: we need €6bn of supply in 3 days for this to be the heaviest month ever for IG non-financial corporate bond issuance in the history for the European corporate bond market. We’re on €43bn as things stand, and it’s not beyond us that we get €6bn, althoughABInBev we would have to believe that it is unlikely given that many investors are still absent from the market this week. Anyway, even if we don’t achieve the record, the total for this month so far is already the second best in the market’s 50-year history. Admittedly, €21.7bn – 50% of the month’s total – has come from just three borrowers, namely, DT, BT and that record euro-denominated €13.25bn acquisition-related fund raising from ABInBev. The deals have all done well, confidence is high and IPTs are being crunched lower at final pricing as demand has been very high. This technical aspect of the market will stay with us through the second quarter.

Other than that, yesterday we had February’s PCE number (Fed’s preferred inflation measure) and it came in at 1.7% and just below market expectations. Consumer spending also was subdued in February and revised lower in January (+0.1% in both cases). That should help offer some short term support to the market (that is, reduced likelihood of a rate increase). Yellen speaks later today.

Here’s to a good week, we’ll 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.