9th October 2015

Pure Shakespeare

FTSE 100
6,375, +38
9,993, +23
S&P 500
2,013, +18
iTraxx Main
83bp, unch
iTraxx X-Over Index
341bp, +1bp
10 Yr Bund
iBoxx Corp IG
B+162.1bp, -0.3bp 
iBoxx Corp HY Index
B+514.6bp, -2bp
10 Yr US T-Bond

Idiosyncratic situations need not derail the credit market… The corporate bond market has had a torrid time of late, but we have pulled back some performance, with positive returns this week on the back of a good rally in spreads. There have been no new calamitous headlines (Deutsche Bank’s Eur6bn+ expected 3rd quarter loss is bad, but not life-threatening), the poor news flow around Volkswagen has been more contained, Glencore has been whippy (in stocks and bonds) but generally better, and the lack of primary activity into overall higher equities has seen sentiment for credit on an improving trend. Offered-side liquidity has been lacking, and so the aggressive and low volume-driven spread weakness through September has seen some decent recovery. That is, we are of the view that there is always an exaggerated move wider in times of so-called ‘stress’, but that disproportionality is somewhat corrected on any recovery. Why? Poor secondary market liquidity in both legs of the trade. Trying to lift paper on Wednesday or Thursday this week, for example, was nigh on impossible at reasonable levels (especially in the beaten up names), with the Street reluctant to go short or lose inventory into a more positive period for the corporate bond market.

Market overall remains cautious, but wants to be constructive… Idiosyncratic events have a habit of fading quickly from the memory. The three aforementioned might be added to, they might not. But there is little one can do in terms of positioning for such events, other than to reduce risk generally and take a less aggressive stance (perhaps move from a benchmark overweight to neutral, or neutral to underweight). We suspect that sort of positioning trade has been in place for a while, cash positions have been built up and any prolonged period of stability (or cheap deals) will see money put back to work.

Mixed into the end of the week… Primary has been light all week, with just Eur1.3bn issued so far since the beginning of the month, in IG non-financials. The DB news was brushed aside as its stock dropped almost 4% but managed to recover much of the loss, and its senior bonds were marked wider only to close flat. The group’s CoCos took a hit on concern they could be written down or converted to equity on any major capital shortfall. DB does have form in disappointing investors. Recall, a few years ago it was one of the first (and still few) major, blue-chip banks to not call an institutionally placed callable LT2 debt issue – when it had the means to do so. The market has a short memory only when it suits! The argument that it would be self-defeating if it did, given that it will possibly need to issue more of this product in the future, won’t wash with too many who will choose to shoot first and ask questions later.

All’s well that ends well… Not quite how the great Bard intended its use, but the proverb seems relevant for the summing up of this week. The new event was Deutsche, while the plunge in German exports just adds to the overall macro gloom. The need to keep policy accommodative in Europe is set in stone for a good while yet (the BoE will be doing the same, despite protestations to the contrary from some quarters), and this will feed back into the corporate bond market through recreating a supportive bid for this risk product. Anyway, we closed out Thursday with spreads generally slightly better. Limited offer-side liquidity helped higher beta valuations, with good tightening in Anglo American paper, little happening around Glencore and VW a touch weaker for choice. CoCos were a tad lower (cash price), as were hybrids. In primary, French telecom tower operator TDF Infra printed a Eur600m inaugural deal off a Eur1.7bn book to take the MTD new issue supply limping past the Eur1bn mark (from just three deals) – and Eur15bn the October average over the past few years (source: Dealogic) looking difficult to match. In HY, Russia’s Gazprom pulled in Eur1bn in 3-year funding costing 4.625%, some 40bp tighter than IPT. Demand for corporate bonds, oh yes.

Finally, the iBoxx IG corporate bond index was at B+162.1bp (-0.3bp), while the HY index was lower at B+514.6bp (-2bp). For the synthetics, iTraxx Main and X-Over closed unchanged from the previous session, at 83bp and 341bp respectively. We should have decent session today given the minutes of the FED meeting overnight making it unlikely they move on rates in October. Stocks in the US took a leg higher on the news with the S&P back up through the 2,000 level, ensuring a good close for the week in most other risk asset classes.

And that’s it for this week: remember to vote in the latest poll, have a good Friday and a restful weekend. Back Monday.

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.