27th November 2015

Happy days

FTSE 100
6,393, +55
11,321, +151
S&P 500
2,089, closed
iTraxx Main
69.5bp, -1xbp
iTraxx X-Over Index
292bp, -5bp
10 Yr Bund
0.47%, unch
iBoxx Corp IG
B+151.8bp, -0.25bp 
iBoxx Corp HY Index
B+481bp, +1bp
10 Yr US T-Bond

Thin markets but a brighter close to the week… On an index basis, we’re back in the black, though we suspect most investors running with a beta greater than their index of choice have been showing positive (IG credit) returns for a while. They will not be up at the 2-2.5% area we thought could have been the case when we started out this year, but positive returns with little of the associated macro volatility impacting stocks isn’t to be scoffed at in an asset class that is meant to be fairly unexciting. Recall that the DAX, for example, has been up 25% and down 3% in the space of five, very difficult spring/summer months. Spreads are wider by 40bp YTD when we were looking at them being tighter by 20-25bp; while government bond yields in say the 10-year area have jumped higher (on their way down again now) after that incredible first quarter. Throw in Glencore, BHP and a lot of Volkswagen and it is small wonder we are not rallying as we might have expected given the positive undertones this month in the credit market. We think that the associated idiosyncratic event risk has seen contagion spread its tentacles too much, but can understand it given the quite atrocious liquidity in the secondary bond market. Most have therefore continued to seek solace and risk through the primary market. Oversubscribed deals, not enough deals and issuers being able to tighten up new issue premiums easily are the price investors are paying as they seek safety in numbers.

Primary still functioning… The US might have been closed for its big Thanksgiving fest, but we were open elsewhere and it was business as usual, albeit in thin markets. New issue markets gave us a rare issuer in Exor (the Agnelli family holding company) – which was rather cheap even for a 7-year (Eur750m at midswaps+175bp) suggesting that interest for periphery risk remains high. The unrated Iliad lifted Eur650m also in 7-year funding at midswaps+183bp and off IPT of midswaps+200bp. Swedbank was in the market with a green bond and the deal was a touch tighter on the break. AIB raised Eur500m in AT1 funding. According to data supplied by Dealogic, the YTD IG supply total is now up at Eur257bn and November’s total at a very reasonable Eur24bn, excluding the Eur1.4bn on show today. We’re just a benchmark deal away from 2015 being the second best year ever for issuance (after 2009). We should reach that marker before the month is out.

Secondary expectedly quiet… Such is the development in terms of liquidity int he secondary market, many investors are seemingly loathed to trade in it. The feeling of not getting a ‘fair price’ is becoming an issue for many and might in itself be contributing to the drop in turnover. Still, the market seemed fairly solid as we could expect given the upside in equities in the session again (+1% across the board). We can only hope that the market is not setting itself up for a disappointment on the 3rd of December (ECB meeting), although Draghi rarely disappoints. The Market iBoxx index has again barely moved this week and is still above B+150bp, or +40bp YTD. In a limited session IG and HY  spreads were essentially unmoved. For iTraxx, the synthetics actually outperformed with Main at 69.5bp and X-Over at 292bp.

Have a good 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.