12th November 2015

Thanksgiving the next marker

FTSE 100
6,297, +22
10.908, +75
S&P 500
2,075, -7
iTraxx Main
70.5bp, -1.5bp
iTraxx X-Over Index
296bp, -6bp
10 Yr Bund
iBoxx Corp IG
B+151bp, unch 
iBoxx Corp HY Index
B+474.8bp, +1.5p
10 Yr US T-Bond

Time to reflect… Armistice Day in Europe and the Veterans Day holiday in the US saw to it that the session was limited in just about every way. We are however almost halfway through the month, and it is worth reflecting on where we stand in terms of performance and supply and what we might look forward to for the next few weeks. Performance matters most, and we see that IG corporate bonds as measured by the Markit iBoxx index are down -0.6% YTD in total return terms, with spreads 40bp wider. For HY it is a better picture, with returns a positive 2.75% but spreads 38bp weaker YTD. The shorter duration nature of the HY market has clearly helped prop up returns, while support has come from the rally in the front end of the curve. In IG, pressure on spreads generally from the likes of the VW and Glencore fallout and a fairly whippy but steepening back end of the government bond curve has seen performance under pressure. Corporate bond markets experienced some outflows in those darker days of August and September, but on the whole they have been light. Unfortunately, such has been the development of the market over the past six or seven years that secondary market liquidity is now so poor that the impact of any selling pressure seems to have a severe and wholly disproportionate impact on valuations. We are confident that spreads will recover, and we look for the iBoxx index to be in the high B+130bp area by year-end (B+151bp now) while we think the HY market could see B+450bp (B+473bp now). For the latter, this is not a tall order given that we do not expect too much issuance between now and then; for IG, it might well depend on how much supply materialises. Another Eur10-15bn this month would be acceptable (with Eur9bn MTD).

US bond market closed… Veterans Day saw the US Treasury bond market closed. Equity markets were open and moved higher amid reduced activity, while at the same time digesting the news of another weak data point from China. This time, industrial production saw a slower than expected 5.6% rise on October and was the weakest print in several months. With a slew of poor economic signals emerging from China, more stimulus is just a matter of time. And that is keeping the markets generally from heading significantly lower. On Wednesday, European equity bourses were 0.5-0.8% higher and the S&P was flattish. With the Treasury market closed and the 10-year Bund yield lower at 61bp, the differential with its Treasury counterpart was at a fresh, record high of 172bp. The 2-year bund yield was at a record low yield of -0.37%. In corporate bonds, a lacklustre session left the market pretty much unchanged. The Market iBoxx IG corporate index was at B+151bp, the HY index up a touch at B+475bp while in the synthetics, Main and X-Over outperformed cash and were at 70.5bp and 296bp, respectively.

Finally, Macy’s the US department store operator, saw its stock take a pummelling after it warned on sales and profits. This bodes ill for other department stores reporting Thursday and Friday and might act to limit any material upside. And oil was lower with WTI at $43 again. With all that here’s hoping for a slew of new supply to keep us all busy today. Have a good 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.