21st October 2015

In need of a catalyst

FTSE 100
6,345, -7
10,148, -17
S&P 500
2,031, -3
iTraxx Main
78bp, -1.5bp
iTraxx X-Over Index
325bp, -7bp
10 Yr Bund
iBoxx Corp IG
B+159.7bp, unch 
iBoxx Corp HY Index
B+499bp, -3bp
10 Yr US T-Bond

Moribund corporate bond market… It is threatening to become a drab month for our market. Even though spreads have recovered a little off those multi-year highs we ended September with, all the recovery came in the opening sessions of October. Since then – well, not much. Not much supply, not much volume, little overall excitement and just posturing and much comment around the Fed. Will they, won’t they? Same with the ECB, but a slightly different dynamic. The former is about raising rates, the latter about potential timing for introducing even easier policy (likely put back after today’s bank lending survey). Throw in Chinese growth concerns, which haven’t abated following the better than expected GDP print earlier this week, and we have to conclude that policy needs to stay accommodative. So equities are treading water amid some very mixed earnings streams, government bonds yields are generally range bound and the corporate bond market fraternity is sitting around waiting for something to happen. Oh, the vagaries of an illiquid market!

It’s not all about the bank lending survey… Anyone would think we’re heading for sustained upside in eurozone growth. That it can happen in isolation and we are in a closed market. Anyway, that’s judging by the initial reaction to the better than expected ECB lending survey. No such luck. The euro currency is still far too strong, there is no inflation and global growth is in the doldrums. We don’t buy into it. The market though chose to believe that any QE announcement, or talk of it, will be put back/more muted come Thursday’s ECB meeting. That kept stocks in the red and secondary credit crawled back into its shell, having threatened very little anyway.

Primary floodgates opened but… They are again littering the market with covered bonds, with some SSA deals; only one sterling corporate (Hammerson) and just Vesteda (Dutch residential real estate fund) in the non-financial corporate sector. So, for us, the deal that stole the limelight was Italian insurer Generali’s 30NC12 Tier 2 issue. More of this type of transaction is what our market needs. The Eur1.25bn issue was cheap, had a repricing impact on the rest of the subordinated insurance sector, and the deal was trading up in the grey by a point as a result.

Closed unchanged… Well, we are waiting for something to happen. Something like today’s Generali deal. The book was 5x oversubscribed, highlighting the level of the sidelined cash as well as the demand there is for a good deal. The cash market and of course the indices closed only slightly better for choice and little really stood out as a major mover. iTraxx Main was lower at 78bp and X-Over better offered at 325bp into the close. Another drab session could – most likely will – be the case again into today’s session ahead of the ECB.

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.