15th October 2015

Who dares wins

FTSE 100
6,270, -73
9,916, -117
S&P 500
1,994, -9.5
iTraxx Main
81.5bp, +1.5bp
iTraxx X-Over Index
342.5bp, +11bp
10 Yr Bund
iBoxx Corp IG
B+160.4bp, +1.3bp 
iBoxx Corp HY Index
B+513bp, +6bp
10 Yr US T-Bond

Blown away the froth, time to taste what’s underneath… After the big bounce in risk assets last week, where there was real demand for corporate bonds, we ought to have pushed on this week. Nothing really changed apart from a few data points around weak macro which we knew were coming and should have had little real impact on the corporate bond market. Today it was the weak consumer price inflation and factory gate deflation in China and expectedly weak industrial production in the EC US retail sales in September rose less than expected and the August numbers were revised down. So this week has become bit of a lost one, shrouded yet again in a cloud of uncertainty – largely of our own making. Secondary has quietened after a fairly upbeat tone and good mood on Monday, and primary has disappointed to an extent that one would think the willingness of investors to add risk and of syndicates to push deals has completely evaporated. The demand is there, as evidenced by the books on the few deals which have managed to print this week. There is a price for everything; some are just lacking the vision. Bravo therefore to BHP today, with a multi-tranche, multi-currency testy hybrid deal on a risk-off day amid worsening macro data. A case of getting the funding in before the commodity situation worsens further – or time to add commodity risk?!

Let it go, let it go, let it go… Admittedly, when stocks do come off so much (DAX back below 10,000, -1.2%) it’s easier to sit back and let it all pass by. And that’s what is actually happening. BHP’s euro/sterling/dollar hybrid is proving to be an exception. As we suggested above, the demand is there and at least someone had the wherewithal to get the deal on the screens and the borrower has his (capital) funding in. The books were just skewed towards the dollar tranches, but we did get almost Eur6bn of orders for the euro tranches (Pnc5.5, Eur 1.25bn, 4.75% coupon and Pnc9, Eur750m, 5.625% coupon) and over £1.6bn of interest for the sterling one (Pnc7, £600m, 6.5% coupon). That was very good considering the state of the market and the industry of the issuer, but it does also show the demand for yielder risk assets. Added to that, state-owned operator Deutsche Bahn was back with a 10-year deal for Eur600m (with just a 1.25% coupon), following up on its longer-dated floater last week. The monthly supply total is now around Eur4.5bn, which is still low compared to the average of the last 5 years (Eur15bn, Dealogic data).

Elsewhere, sideways except for the obvious… Secondary cash was fairly quiet and weaker, but VW and Total SA hybrids were under some particular pressure again. Subordinated insurance paper was slightly better offered too. CDS was weaker, along with stocks and iTraxx. There were few sellers again, which is to be expected, and investor cash balances are at high levels, hence the need for the primary market to come good. European stocks were looking as if they were going to end off their worst levels for the session, but that idea was laid to rest when Walmart piped up with a poor outlook for fiscal 2017. That wiped almost 10% off its stock and took the S&P/Dow lower with it. So we again have poor economic data from the US pouring water on prospects for an October or even 2015 rate hike over there. Treasuries rallied with the 10-year back at 2.0%, the dollar weakened and the ECB will be exasperated. A stronger euro will hamper recovery in the eurozone and so the European central bank will have to be adding more stimulus soon in the race to the bottom. The 10-year Bund yield was down at 0.54%.

In the end… The iBoxx IG index was up at B+160.4bp (+1.3bp), with the usual higher beta sectors bearing the brunt of the weakness. The HY index was at B+513bp (+6bp). In the synthetics, S24 Main was higher again at 81.5bp (+1.5bp) and X-Over at 324.5bp (+11bp). Volkswagen is now under investigation by the Federal Trade Commission (FTC), and while we’re not sure what that means (false advertising?), it can’t be good.

Let’s be careful out there.

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.