3rd November 2015

No Halloween frighteners

FTSE 100
6,362, +2
10,950, +100
S&P 500
2,104, +25
iTraxx Main
71bp, unch
iTraxx X-Over Index
298bp, unch
10 Yr Bund
iBoxx Corp IG
B+154bp, +2bp 
iBoxx Corp HY Index
B+483bp, unch
10 Yr US T-Bond

Core-porate bonds are more than just a diversification play… The European corporate bond market enters November sitting on losses of 0.6% on a total return basis for IG, as measured by the Markit iBoxx corporate bond index, and gains of 2.2% in HY. For benchmark investors, spreads for the former have widened 42bp and for the latter 48bp. It doesn’t make for pretty reading, especially as we all had high hopes for this safe-haven asset class in 2015. Underlying government bond yields have been less of a nuisance for the shorter duration HY complex given that the front end has been well-anchored all year, whereas the belly and back end of the curve have been much more volatile. Equities YTD have done much better, but the highs (+25% in the DAX) have been met with real lows (-3%). Credit markets have seen little of the tragedy associated with volatile equity this year. Admittedly, we have come unstuck on China, Fed and macro concerns as well as big-time idiosyncratic issues around the likes of VW and Glencore (so have stocks, by the way). But such is the lumbering, almost lummox-like nature of the corporate bond market (poor liquidity) that the turnaround can be quite laboured too. Still, we are now being viewed as more than a diversification play, and the gaining in prominence of this fixed income asset class has seen it become a core one. We are all still contending with the many ills that could hurt stocks most – or at least threaten to, through the medium term: global growth, geopolitics and high levels of corporate, government and consumer indebtedness. You know, it’s part of the make-up of the so-called ‘rate race’. This dynamic is not going to change any time soon. So we believe that the arguments for staying with corporate bonds, adding more exposure even, continue to hold.

Primary off to a good start… We needed some new issue market activity to keep us ticking over on what otherwise would have been a drab Monday, and were not disappointed by today’s efforts. Almost Eur2bn was printed in non-financials in this first trading session of November. US auto parts supplier BorgWarner, FCE Bank and Swedish healthcare products group Mölnlycke were the corporate market’s contributors, while Nordea took out Eur750m in 10nc5 T2 funding in the subordinated banking sector. The Nordea deal was particularly strong on the break (book almost 5x subscribed). BorgWarner’s inaugural euro deal was a 7-year, no-grow Eur500m at midswaps+128bp, while Mölnlycke’s transaction was also a Eur500m no-grow with a 2024 maturity at midswaps+110bp. FCE’s Eur750m was for a 5-year maturity on a 3x covered book, coming at midswaps+123bp.

Secondary market ticking over, helped by a firm tone in equities… Equities in the black by up to 1% (DAX) saw to it that corporates would be well-supported. In fact, credit has been on the up for a while now, and the feel about it now is such that we are in a sellers’ market. Halloween has failed to scare anyone away. Screen prices don’t really work. The Street again feels a little short here, and we believe any positive bias will persist, with investors are looking to add or ramp up portfolios. Those excessive cash positions are in need of being filled, after all. Finding paper – enough of it, or the right kind – is once again the issue. The Markit iBoxx IG corporate bond index closed a couple of basis points wider, but most of that was due some month-end rebalancing and hence not a fair reflection of the market today. HY was unchanged at B+483bp. The iTraxx indices were left at 71bp and 298bp for X-Over.

Finally, US equities closed strongly with the S&P at 2,103 or +1.2% higher. Perhaps the poor manufacturing ISM (showing that the US manufacturing activity barely expanded in October, at 50.1) gave some hope that the Fed might not raise in December? It seems that each poor data point could be a reason to rally. Anyway, the better US close will ensure that we have a platform in Europe to open in stronger fashion today.

And that’s it, wishing you all a fine day.

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.