25th September 2015

Where’s Hannibal… Smith

FTSE 100
5,961, -71
9,427, -185
S&P 500
1,932, -7
iTraxx Main
86bp, +5bp
iTraxx X-Over Index
354bp, +17bp
10 Yr Bund
iBoxx Corp IG
B+160bp, +3.3bp 
iBoxx Corp HY Index
B+517bp, +11bp
10 Yr US T-Bond

It all started brightly… With a Norwegian rate cut followed by a Taiwanese one, VW stock higher and European equities firmly in the black – to coin the oft-used phrase made famous by the A-Team’s Hannibal Smith, “I love it when a plan comes together”. Except there was or is no plan. There was hope, which led to some short-covering and perhaps some misguided bottom-fishing for assets where beaten-up valuations in some places were too tempting to forego. Broadly though, credit didn’t really get sucked into that brighter open, with just a very tentative bid emerging. Our market moves too slowly for this to be the case – that’s fixed income for you. Now BMW looks like it might join VW in the doghouse, with reports suggesting it may have failed real-world road emissions tests. Its stock was 8% lower at one stage. Dare we suggest it, the manipulation theme is all over us, as seen in the skewing of valuations. Look at the deal from Unicredit today. We don’t often talk covered bonds, but their 5-year deal had an initial price talk at midswaps-9bp (+8bp premium) against the German Länder issue, which was also in the midswaps-9bp area on IPT. It’s no trick question but which has the better value – German mortgages (Unicredit/HVB) or German risk (Länder)? I think most would say the latter, but unfortunately the ECB doesn’t buy Länder. Unicredit got their Eur500m, at midswaps-9bp on a barely covered book of Eur550m.

Another day in the trenches… It all went awry very quickly after that promising open. Led by the headlines, then equities and then yuk. The synthetic indices came under the cosh, and BMW saw its 5-year CDS trade up at 150bp before settling at around 125bp (mid), with VW’s CDS around the 215bp area. Everything else was in defensive mode. And that means low flow, poor volumes, no liquidity and a primary market all but slammed shut. No one knows where this emissions story is going, but BP/Deepwater is likely going to look like a drop in the ocean, with the late 1980/90s tobacco lawsuits a more appropriate comparison. Still, the contagion impact is so wide and far-reaching that it doesn’t actually make much sense. Perhaps few really believed assets were fairly priced and piled in because that’s what everyone else was doing. If you can’t beat ’em, join ’em. It seems only the financial sector has been spared any pain. Anything non-financial in corporate bonds has suddenly become toxic. That ought not to be the case, but few are going to go against the tide into this maelstrom of uncertainty engulfing such an important industry group. So wider we go, while there is little activity (no swathes of sellers) to justify the extent of the weakness in corporate bond markets. Admittedly, the market (investor community) is just beginning to look a little scared, but there’s no panic yet – just a buyers’ strike.

And it’s miserable… A slew of weak US data (durable goods, unemployment applications and business investment) kept the reins on any chance the US might rally. Global and domestic growth concerns came to the fore. Another -1% move in the S&P, -2% for Germany’s  DAX, the FTSE back below 6,000 and oil futures lower again all made for miserable reading. At least US Treasuries were better bid, pushing the 10-year yield down to 2.12% (off the intra-day lows). The DAX is now down 3% YTD and the FTSE 8%. Credit took its cue from this and wider she went. Looking at it through the broader iBoxx IG corporate bond index, the punishment meted out saw the index up at a painful B+160bp (+3.3bp) with weakness everywhere – autos/hybrids and LatAm risk especially took a battering. Returns are creeping lower, now -1.4% YTD in IG. For HY, we took even more downside. The index widened by 11bp and returns YTD have dropped to just 0.25%. Oh dear.

Happy Friday and wishing you a stress-free weekend.

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.