EU: Dumbing it all down

There are some decent returns (2- 3.5% in 2015), and the ECB will do their utmost to keep it going until the reforms kick- in and we get a return to a sustainable growth dynamic. So don’t deviate from the message: don’t fight the ECB. Flair though has been stifled. And that’s about where we are as we await the ECB’s plans to lift the corporate bond market and more.

There is some risk-asset weakness to contend with at the moment on China event risk, plummeting oil, the Japanese recession, Greece’s elections/economic woes and the poorest of secondary market liquidity; but dare we say it, we think they’ll play out and we’ll be back on track. We won’t get there in a straight line; there will always be bumps along the way – but tighter in spreads (20-40bp in 2015) and lower in yields we should go; and, compression between high and low beta should continue. The poor TLTRO take-up (see below) should ensure that 2015 kicks-off with the continuation of the theme that has been with us since 2012. In the meantime, the 10-year bund is at record lows having jumped higher in previous sessions (now at 0.65%). Spreads again only edged wider in today’s session (which perhaps is no bad thing given that it helps leave some performance for next year), but returns will have edged higher too (IG 7.7%, HY 5.7%) helping soothe some of the current concerns.

The TLTRO take-up came in at €130bn, in line with consensus but nevertheless very disappointing given that the ECB had allowed for a combined €400bn from the two auctions. It’s almost a case of sovereign QE here we come – as if the market didn’t expect that anyway. As well as bund yields heading south, peripheral bond yields declined and equities played out in mixed fashion.

Few will likely bet against the 10- year bund in the 50s (yield) perhaps sometime in January and it does appear BTPs and Bonos will see yields at 1.50% before the gap higher. The lure of corporate bonds is growing – even at these levels where real returns continue to hold up as inflation stays at (or falls) to low(er) levels. Inflation adjusted returns for IG credit this year are up at 7.3%, and 1-year inflation forwards are at 0.23%, which could leave real returns at 2%+ for 2015. Credit has had a great 2014, it could have a very good 2015.

European government bonds were better bid following the modest TLTRO take-up number with 10y Bund yields reaching new lows (0.66%). Euro IG corporate spreads were unchanged to +3bp wider with weakness seen in Oi (formerly Portel) bonds (down up to -0.875pt) amid news reports that Telefonica, Oi and Claro are planning a $15bn offer for Tim. In similar fashion, HY corporates were also generally unchanged today amid light flows. Altice (-1.5pts) was placed under review for downgrade by Moody’s following confirmation that the company has signed a definitive pact to buy Portuguese assets of Portugal Telecom from Oi. CoCos and corporate hybrids were underperforming (down -0.25pt/-0.5pt). The iTraxx indices were flat on the day with mixed stocks, with Main at 60.5bp (unchanged) and X-Over at 340bp (-0.75bp, mid, versus the open).

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