EU: Triple-Bs? Yes please!

Volatility (read any weakness) in stocks is no longer leading to much weakness in corporate credit (in HY) where we seem to have heeded the message of the Q3 weakness – don’t sell, but add if any pockets of liquidity emerge. After all, the need right now is to get invested and absorb some of those bulging cash piles.

The view in the market is that the ECB balance sheet expansion exercise will include the buying of corporate bonds. A new marginal player with an unlimited balance sheet we do not need. But, if they come, Q1 will see record low spreads for IG non-financials and that hunt for yield will also see HY spreads tighten as investors will be forced to move down the curve. The ECB will not have to lift too much of the market – they probably will not be able to; but the fact they will be there will see some potentially significant tightening across the corporate bond market in Europe. If they do not get involved, we will tighten more gently. Either way, it’s actually going to be a frustrating 2015 for many.

Activity in primary markets continued to be robust after last week’s issuance rush. The supply was exclusively from non-financial BBB-rated credits with more spread on offer, a welcome development given the high quality supply we had over the last few weeks. BskyB (Baa2/BBB) priced a three tranche deal (€850m, 9y at mid swaps +100bp, £450m 6y at UKT+140bp and £300m, 15y at UKT+165bp), RCI Banque (Baa3/BBB) issued a €500m 3y FRN at 3mE+57bp and Thermo Fisher (Baa3/BBB) sold €640m worth of 10.5y bonds at midswaps+100bp with that rare 2% coupon.

In secondary, low beta cash credit felt a bit weaker (spreads in IG corporates were +1bp/+3bp wider) as last weeks’ heavy supply put a halt to the spread tightening trend. Higher beta credit products were moderately weaker, despite stocks ending the day on a strong note. CoCos were down -0.25pt to -0.5pt and corporate hybrids were a touch softer as well, although the new ARYNSW hybrid issued last Friday outperformed (up +0.5pt). In HY, prices were unchanged overall. Abengoa was the main highlight as the company’s bonds recovered significantly (+15pts) after last week’s c20pt selloff which was caused by the accounting treatment of last October’s debut bond deal from Abengoa Greenfield (i.e. should it be classified as recourse or non-recourse). 10y Bund yields ended the day +2bp wider at 0.80% while iTraxx indices reversed their initial widening late in the session to end marginally tighter. iTraxx Main closed around 63.5bp (unchanged), Xover at 355.5bp (-2.5bp) and Snrfin at 67bp (unchanged).

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