Weekly Credit Update

CDS indices have performed during the week with iTraxx Europe currently at 168bp and iTraxx Crossover currently at 704, i.e. down by 9bp and 47bp, respectively.

While we have seen a very positive start to the year with high primary market activity, including decent secondary performance, we caution that the credit market is not totally up and running yet, as secondary market activity is still limited, especially within the nonfinancial corporate space. In the secondary market, we see more demand for shorter-dated than longer-dated bonds, leading to better performance in the short end of the curve.

High primary market activity continues

So far, the corporate credit market has been flooded with new issuances in 2012, and last week’s high level of activity in the primary market has only accelerated this week. The trend from last week with an over-representation of financials and autos coming to the market has continued, but we have seen a more heterogeneous field of issuers this week.

Within the non-financial corporate space, this week’s new bond issues have generally performed well in the secondary market, especially Valeo, Carrefour and Volkswagen. In the investment grade non-financial corporate space, the general secondary trading activity continues at a low level, while we see good activity in the high-beta space with demand for perps and high-yield names, including ISS, Vestas and Stena.

Within the financials space, we have generally seen a good performance of new floater issues, while the new fixed issues have not moved much in terms of spreads. So far, the primary market for financials has had a strong start to the year,  albeit dominated by relatively strong Nordic, Dutch, Swiss and UK issuers. An important test of the primary market will be the success of French, Italian and Spanish banks in entering the market.

In our view, the year’s first two weeks’ supply of shorter-dated (2Y) financials has been greater than anticipated, especially given liquidity from the ECB’s 3Y LTRO. However, these issuances are likely to be driven by factors  other than short-term cost of funding minimisation. The market signal of not being reliant on the ECB could be a driver, and from a broader funding perspective, maintaining full secondary curves and access to debt capital markets could be another one. Moreover, banks that issue senior unsecured bonds in the debt capital market do not tie up assets as is the case with ECB funding. However,
in our view, the stigma from using the ECB’s 3Y LTRO should be limited, as the terms are very attractive, and as it has already been heavily used (almost EUR500bn so far).