3rd February 2016

We had a deal! Anyone care?

FTSE 100
5,922, -138
9,581, -177
S&P 500
1,903, -36
iTraxx Main
98bp, +1bp
iTraxx X-Over Index
387bp, +7bp
10 Yr Bund
0.30%, -4bp
iBoxx Corp IG
B+175.7bp, +2.5bp 
iBoxx Corp HY Index
B+595bp, +8bp
10 Yr US T-Bond
1.86%, -9bp

Drip, drip, drip… The poorer news flow continues. The trepidation we might feel because of it is more limited, we think (we’re used to it now), but its impact is as impressive. We might also not be having the wild swings in asset prices (oil aside) that we did in January, because at the moment we are heading in one direction – and that’s down. Be it another oil major with a huge write-down in assets, the accelerating decline in producer prices or weak macro suggesting unsustainability in any recovery dynamic (Italian unemployment), the net result is one of concern that the current malaise has enough legs in it to leave this month looking weak as well. And we are only a couple of days in! It all left European stocks over 2% lower, oil floundering and some 4.5% down per barrel (was worse), government bonds bid up some (Treasury yields below 1.90% in 10-year) and cash credit generally stable at the start but weaker later amid little meaningful activity. The good news was in primary – we had a corporate bond deal! The demand for credit is quite apparent, as evidenced by the 9x oversubscribed book for the 7-year deal from the high triple-B rated EasyJet. The inaugural offering of €500m was gorged on by a parched investor base and was the first non-financial deal since mid-January. The borrower/syndicate took no chances, pricing it generously. It finally managed to price almost 20bp inside the initial talk (still 15bp cheap versus, say, Ryanair) and might spur others to chance their arms, put attractively priced deals on the screen and let the demand (market forces) take those initially indicated ultra cheap funding costs lower. It’s early days, but could it be a decent February for primary despite the difficult backdrop? There are certainly plenty of borrowers on the road in both the Euro IG and HY markets to feed into the demand should the markets play ball.

And here we go again elsewhere… We are back to focusing on oil after a second day of poor data on the industrial front. The macro picture continues to offer little to cheer about and the odd positive earnings report for the fourth quarter is being brushed aside as we focus on the bigger picture. Close on -2% for US stocks (energy bearing the brunt of it), the same or more for Europe, and it was a case of all hands to the proverbial pump again. WTI futures were back at $30 per barrel. If the non-farms report confirms slowdown dynamics come Friday, then we’re likely in for a difficult period into mid-February. Treasuries curried much favour allowing the yield on say the 10-year to drop 9bp to 1.86% and to a level last seen 10-months ago. 1.75% could be the next stop especially if that non-farm payroll number on Friday is friendly. In Europe, the DAX was off almost 2% and is now lower by 11% for the year to date, while the 10-year Bund outperformed leaving its yield down at 0.30% (-5bp). Italian, Spanish and Portuguese yields all rose however in what appears a proper flight to quality trade. While the picture may have been all too familiar, it didn’t have the same feel to it as the carnage experienced at times in January.

Initial euphoria or relief soon fades… EasyJet gave everyone hope in corporate bond markets. After all, we had a deal to get our teeth into. But lower stocks, oil futures heading south and weaker news flow took any euphoria away. Corporate bond spreads came under some pressure and wider we went again, or higher for the Markit iBoxx index which closed 2.5bp weaker at B+176bp while the HY index was showing 8bp of weakness as it rose to B+595bp. The iTraxx indices rose as well as the were better bid amid equity weakness but they didn’t quite visit the 100bp Main/400bp X-Over levels, although they likely will in today’s session. They closed at 98bp and 387bp, respectively, for Main and X-Over.

Batten down the hatches. Could be a wicked 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.