4th November 2015

Show me the premium!

FTSE 100
6,384, +22
10,951, unch
S&P 500
2,111, +7
iTraxx Main
70bp, -1bp
iTraxx X-Over Index
295bp, -3bp
10 Yr Bund
iBoxx Corp IG
B+152.8bp, -1.2bp 
iBoxx Corp HY Index
B+476.8bp, -6.5bp
10 Yr US T-Bond

QE is working, really?… It does, if it is about lowering yields, helping banks and large corporates refinance at lower cost, keeping the corporate and consumer default rate at bay and keeping the economy ticking over while the politicians dither about enacting longer term structural reform. But it hasn’t really done the job in promoting sustainable growth and helping inflation push higher, nor in reducing corporate and consumer indebtedness. It has merely pushed on that string. The ECB paper out Tuesday couldn’t really say anything too different than it did. QE, and various forms of it, was the only remaining option central banks had open to them to keep the global economy from falling into depression (it still might). Reducing deposit rates further, deeper into negative territory in the case of the ECB and the Swiss, will not work. For the consumer, the mattress beckons. For corporates, hoarding cash like everyday was a potential new crisis point, they will pay up for parking their cash in the banking system. They are already and a few more basis points will not make much difference. So expect some action from the ECB in December, if not it will come in Q1. The Fed and the ECB can diverge policy and the market is already suggesting that to be the case with the 10-year Treasury/Bund spread back at close to the highs (165bp now). We are not in any way jolly about the recovery potential. Lower or anchored yields means safe, higher yielding (more than government bonds) assets and low volatility dynamics will keep investors married to their corporate bond positions. The long term solution? Pain. That is, the world needs cold turkey treatment. Nobody is prepared to administer it.

New issue premium vanishes in double quick time… If you see the herd coming, it’s usually too late. The new issue premium for deals just about vanished today. Through September and to the beginning of last week, issuers stepped back for fear of being ridiculed for being desperate. Investors were too scared to take on much risk in case they got it wrong. In the space of 3-4 sessions, it’s risk on, there’s a scramble for paper and risk premiums have vanished. Assuming of course, that today’s sole IG non-financial deal, from Italian utility SNAM is anything to go by. An 8x oversubscribed book, saw the initial new issue premium of 18-23bp wiped out for the Eur750m deal as the final price of midswaps+77bp attested to. We are not shocked by it. We think this will be the case going forward now unless some event sparks a risk-off moment, or period, again. Other than that, there was the usual covered bond issuance, we had a green SSA deal and Barclays was out with T2 funding.

Secondary spread market bias still supportive… That was despite European stocks spending most of the session in the red only to close pretty much unchanged, while the US earnings stream today was mixed with more downside than up (S&P up 7 points). Automakers’ quarterly earnings were good (Chrysler, Ford, BMW) while most of the reporting banks missed and announced deep job cuts – again. VW was back in the news on Monday night with emission tests possibly impacting its Porsche brand, but initial hybrid bond weakness at the open on Tuesday was mostly reversed as the session progressed, down in the end by around 0.75 points. Low beta risk was unchanged to a basis better for choice, while higher beta paper was up to 3-4bp tighter, with clear investor willingness to add. The tightening trend was at around the same level in the financials sector across senior and subordinated debt. Overall, we closed out with the Markit iBoxx IG corporate bond index at B+153bp and the HY index 6.5bp tighter at B+477bp. In iTraxx, S24 Main was a basis point tighter at 70bp and X-Over 3bp lower at 295bp.

Happy Wednesday.

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.