31st May 2016

Twist in the tail

FTSE 100
6,271, +5
10,333, +47
S&P 500
2,099, +9
iTraxx Main
71bp, unch
iTraxx X-Over Index
305bp, unch
10 Yr Bund
0.17%, +3bp
iBoxx Corp IG
B+147bp, unch 
iBoxx Corp HY Index
B+489bp, -1bp
10 Yr US T-Bond
1.85%, unch

Seeing out May on a high…

down and up

Down and Up: S&P and DAX indices

That was a good recovery week just gone. We’re not sure why it should have been so given that we still had mixed data on the macro front, but maybe there were signs in the US data – as well as in any subsequent rhetoric – that a rate rise would be delayed come the June meeting. Does it really “all hang” on that 25bp hike? Anyway, with just this session left for May, the S&P index is up 1.6% in the month – but we did live through it being down 2%. The DAX has moved even more in both directions, up 2.6% at the moment but down 2.5% at its worst point earlier in the month. These are difficult markets to trade. Oil is trying to cozy up to $50 per barrel. Credit markets have in contrast been relatively tranquil. Cash has exhibited none of the volatility associated with stocks, recording +0.2% of performance in total returns for May, while holding on to returns of 2.9% year-to-date. Spreads have barely budged. In HY, the monthly performance has been flattish (+0.1%), while YTD returns reside at 3.4% amid some pick-up in supply.

Sterling-denominated credit is worth a mention. The UK might be embroiled in the Brexit debate, but the corporate market has had a decent time of it. Spreads have edged wider by just 4bp in the month on an index basis, but returns for May are up at 0.3% and this longer duration market (than euro-denominated credit) has returned a stunning 4.1% YTD.

ECB set to dominate thinking of credit investors

The focus for credit markets, however, has been totally around primary and the ECB. The latter we will discuss a little more in tomorrow’s note, given that the ECB will now be free to dabble in the corporate bond market. We expect the spread markets to show some significant tightening – whatever the ECB decides it feels it can lift from the secondary market. We still expect our B+100bp target for the iBoxx IG index will come more clearly into view as the summer months progress. There will also be a positive impact on the HY market as investors are forced to add this higher yielding risk which serves to prop up returns and performance.

Non-financial IG issuance for the month thus far is at €42.6bn with a session to go, but it is already the third best month in the history of the European corporate bond market for supply. A subdued start to May became a little more upbeat for senior financial supply, and €14bn for the month is around the monthly average seen this year so far. For HY, total issuance passed €5bn for a month for the first time in 2016 (just €5.1bn), with the fourth consecutive month of rising issuance. This bodes well for the high yield market and we think that depending on how the ECB’s interference in the corporate bond market plays out, the second half of 2016 could see consistently higher levels of supply.

June promises a nervy start

Consumer spending, home prices, the manufacturing ISM and finally the non-farm payroll report on Friday cap off a busy week of US economic data reports. In Europe, already on Monday we saw German input prices fall a massive 6.6% in April year-on-year (export prices fell 2% in the same period), month-on-month consumer spending dipped 0.1% in April in France (yoy increased 2.5%), and the Spanish inflation rate for May came in at -1.1%. Nothing there for the ECB to get excited about – more the ongoing worrisome need for policy to remain accommodative, with the potential for more measures somewhere down the line quite likely. Oh dear! The ECB meets on Thursday and the Fed not too much longer after that.

flagging ECB

All eyes on us: The ECB bond buying programme in the spotlight

With the US and UK closed, Monday was a subdued session across the continent, but slightly better stocks will be no pointer for how we might kick off this final session of May. Anyway, we could expect a deal or two, but most will be focused on squaring up their positions and assessing monthly performance.

All eyes will now be on the ECB’s corporate bond buying programme, assessing how much they might buy, the price and the impact on spreads. All this should not be lost corporate issuers – because they can look forward to an extended period of lower funding costs but more importantly, they can bide their time as to when to issue.

Have a good day, back in June.

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.