2nd October 2015

New chapter, but the saga continues

FTSE 100
6,072, +11
9,509, -151
S&P 500
1,923, +4
iTraxx Main
93bp, +3bp
iTraxx X-Over Index
383bp, +8bp
10 Yr Bund
iBoxx Corp IG
B+169.6bp, -0.6bp 
iBoxx Corp HY Index
B+551bp, unch
10 Yr US T-Bond

Chapter 10 of 12 and it’s the same story… We didn’t really expect to turn the page into a new month and meet our nirvana of rallying assets, and finally having put to one side the Fed, China, the commodity cycle and Volkswagen. Markets never draw a line in the sand – except for performance valuations. So the aforementioned quartet (there’s more) continue linger. Nevertheless, we tried to pull away from the troubles with a very good start to this month’s opening trading session. The early skirmishes were good but soon faded. No one knows why. Clearly few are convinced that we deserve to rally, ought to rally or can rally away the troubles. The economic data today (eurozone and UK PMIs, US ISM) left much to be desired that we’re any closer here to even economic stability. Glencore equity – and debt – was extremely volatile and for good measure, as German stocks fell into the red (-1.5%) after being up 1.5%, Volkswagen started to give up ground. Each headline – and usually they are a rehash of old news – or news flow we expect seem to be an excuse to sell VW paper. It’s not as if we don’t know that VW will be fined extensively and commodity-reliant companies such as Glencore are caught in a trap. The fast money community though are making hay while the sun shines for them, resetting shorts at each emerging opportunity. The resulting volatility is the real money (long-term) asset management communities bête noire.

Price action a function of atrocious liquidity and fear… Some of the price action currently being seen is the stuff of nightmares. And we don’t even have a global financial systemic crisis. Let’s be clear, many corporate bond fund managers do not have to sell. But taking some risk off the table and building in some defensive cash positioning, in case sizeable outflows materialise, might be seen as a sensible strategy/trade. But how does one do that when Glencore senior paper in a 5-7 year maturity trades as low as Eur66 (cash price) only a couple of days later to rise to the Eur80 area, and then back down to the low Eur70s?! That’s all in two days and Eur1-2m in size per enquiry, for example, all on headlines. Who said timing was everything? And that occurs against a background where stocks whipsaw between being in the red and black leaving the likes of the under fire VW cash senior bonds to open 30bp tighter, only to give most of it back as the session progresses. Admittedly, the rest of the complex held steady in the day with corporate hybrids (utilities mainly) remaining firm to perhaps a touch better bid.

The sucker punch comes early in Q4… Let’s be truthful, we were all lulled into a sense of security as we opened for business in Thursday’s session, but as it wore on the confidence and upbeat tone faded. The mixed picture will be added to today (Friday) once those non-farm payrolls are released. Anyway, credit did little apart from the moves highlighted above. We were left with the iBoxx corporate index for IG at B+169.6bp and essentially unchanged with the HY index stuck at B+551bp. Hybrids and CoCos managed small gains and the rest was left pretty much unchanged. The iTraxx indices moved higher but the need the session wider, better bid as equities slipped with Main at 93bp (+3bp) and X-Over at 381bp (+8bp). On the supply front, the Finnair hybrid issue takes the plaudits. It was rather opportunistic to go ahead with the deal, but the syndicates got it right with the mood of mainly, we would think, Nordic investors prepared to fund the airline. Interest was so good that the borrower managed to increase the size of the deal from Eur150m to Eur200m. It helps that the deal was cheap, that Nordic funds are almost desperate for ‘local’ paper (book just under 2x subscribed) and the 7.875% yield no doubt was too good to miss for this national flag carrier.

On a housekeeping note, this site is now a month old. May we take this opportunity to show our appreciation to all our readers who have visited the site, commented on it as well as on the reports and have signed up to receive the daily email. We hope it helps you in facilitating your investment decisions.

Have a good day and a restful weekend.

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.