10th October 2016

Under seige

FTSE 100
7,044, +44
10,491, -78
S&P 500
2,154, -7
iTraxx Main
74bp, unchanged
iTraxx X-Over Index
333bp, unchanged
10 Yr Bund
0.02%, +3.75bp
iBoxx Corp IG
B+124.7bp, unchanged 
iBoxx Corp HY Index
B+432.6bp, -1bp
10 Yr US T-Bond
1.72%, -2bp

Sterling, no longer resolute…

british-poundSterling, yields, Deutsche Bank, taper-tantrums, non-farms, oil.. it’s all kicking off. What a couple of weeks we have just gone through. But what’s really to worry about in all this that sees us having some fairly disproportionate price action? The potential for a hard Brexit was always the more likely way the UK was going to proceed, and by all accounts we might have that as the modus operandi of the UK government’s stance.

But should the “fat finger” really ought to have been THAT nervous? Deutsche Bank related event-risk is still with us, but if reports of a reduced fine are true alongside potential asset sales to help pay for it – and keep capital levels at acceptable limits, then the share price might be close to a floor. And AT1 debt would be too!

The taper tantrum ought to be behind us, given Draghi’s comments in Washington and other ECB members confirming that tapering was never discussed. Nervous markets where positioning is mostly all one-way (long duration in this case) and mischievous spurious reports are never a healthy combination. From the non-farm payroll report we gained little fresh insight around a definitive move, but overall suggesting that a November hike isn’t coming – so we can probably relax on that front.

Meanwhile, a December US interest rate hike won’t be the end of the world. All that’s left is oil. Volatile, and the markets playing to each and every headline around US crude stockpiles and Opec/non-Opec deals – but still holding around $50 per barrel, and hopefully anchored around here +/- a few dollars.

We’re used to there not being much excitement in the secondary market in euro-denominated corporate bonds. This market has become the playground of the ECB, as it bullies all and sundry on the way to average weekly purchases of around €1.8bn. The rest (investors) have scattered and seek solace, comfort and bonds in the primary market.

The sterling market is smaller, but the BoE “has done an ECB” and entered the fray there which should offer some support to valuations. And with the sterling currency being dumped last week, there was only small pressure on the corporate bond market. There is additional support coming from by a large domestic, captive audience to compliment that willing buyer in the BoE through its reverse auction mechanism.

So into the eye of the storm around sterling on Friday, spreads as measured by the Markit iBoxx index moved just over a basis point higher to G+155bp – and 4bp wider in the week. They are nonetheless still some 30bp tighter YTD, while index returns at 12.2% are still excellent – but way off the peak seen a few weeks ago of 17.4%. In the euro-denominated market, we actually tightened by 2bp in the week, with spreads on the iBoxx index left at B+125bp at the close.

That cacophony of events put pressure on government bonds and we saw a serious back up in yields. From a recent low yield on the 10-year Bund of -0.16% (and within touching distance of our -0.20% target), we finished the week in positive territory at +0.02%. The Gilt market fared worse – much worse – and we had the 10-year left at 0.97%, some 10bp higher on Friday alone and over 20bp higher from the week’s low.

Primary curiously light


Hellenic Petroleum: Rare Greek deal

The more interesting area of the primary market is the HY sector which saw €1,255m of issuance from four deals. And we saw a rare deal from a Greek borrower in Hellenic Petroleum. That follows a €12bn month for September. In IG, utilities dominated with deal from Terna, EdF and Hera along with a €200m tap from REN.

Sodexo was the only other non-financial IG borrower and we had a paltry €4.45bn issued in total. We get the impression that the market isn’t firing on all cylinders and we’re not sure that some of the noise associated with the factors mentioned above are having an impact.

After all, the deals are all being well-oversubscribed, IPTs are being rammed tighter by 10-20bp and we’re generally getting some decent performance on the follow. We’re up at around €220bn in IG non-financial issuance for the year so far. Under normal circumstances, we could look for another €45-50bn to get done over an 8-9 week time frame. That looks a stretch at the moment.

Busy week ahead

The third quarter earnings season is nigh with Alcoa kicking off before the US market opens on Tuesday with others to follow including JP Morgan, Citigroup and the recently beaten-up Wells Fargo. There’s otherwise little by way of data in the week, just US retail sales at the end of it. The ECB’s latest weekly shopping list is due to be published later today as well.

Have a good start to the week. Back tomorrow.

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.