Marketing Communication
Euro Corporate Weekly Get used to high volatility
Group Economics Macro & Financial Markets Research Hyung-Ja de Zeeuw & Aline Schuiling +31 20 628 3551 Hyung-ja.de.zeeuw@nl.abnamro.com
DISCLAIMER: This report has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead. This report is marketing communication and not investment research and is intended for professional and eligible clients only.
05 June 2015
Draghi’s intervention to cap bond yields fails due to volatility remark, yields soar Market is stuck between early QExit speculation and ECB intervention Total returns are in negative territory for the second time this year Credit curves steepen as investors find safe haven in short end of the curve
Draghi fails to stem surge in Bund yields
Market is stuck between early QExit speculation and ECB
Mr. Draghi’s verbal intervention to cap bond yields and the
intervention
euro failed spectacularly. His remark that “…we should get
The move in yields in itself is not remarkable. It’s the pace. In
used to periods of higher volatility” completely wiped out the
just three days the 10y Bund yield went from around 0.50% to
dovish content of the speech. Already during the press
almost 1% before reversing. This is an unprecedented move.
conference, the yield on the 10y Bund continued to surge, breaking through the 0.85% level. The euro strengthened
The high level of volatility will keep popping up in the coming
further against the dollar.
months as markets will be yo-yoing between better macro fundamentals and ECB intervention. Positive surprises of
On Thursday morning, the 10y Bund yield and the euro
macro-economic data will start a sell-off in the Bund. The
continued their climb from the day before. The Bund was well
tightening financial conditions then provoke a verbal
on its way to touch the psychologically important 1% mark,
intervention of the ECB.
only to retrace just 0.005% before actually reaching it. With an intraday print of 0.995% we’ve reached a new year to date
We think the ECB will continue with QE despite recent better
high.
economic data. Indeed, Mr Draghi stressed that if anything, the ECB could step up QE if needed rather than end it early. The
ECB’s verbal intervention to cap bond yields fails
financial conditions due to higher bond yields and a stronger
In %
Draghi: "get used to periods of higher volatility"
1.0
0.8
euro, as it could nip the economic recovery in the bud. Following the upward trend in bond yields of the last few days, financial conditions have tightened somewhat more than the
0.6 0.4
ECB is determined to fight against any early tightening of
Recovery long- term inflation expectation
ECB assumed in its projections for this year. Given current Coeuré announces ECB front-loading
0.2 0.0 01/04
market prices, weighted average eurozone bond yields are somewhat above the levels assumed for this year, while the gap was more significant earlier on Wednesday when the bond
11/04
21/04
01/05
11/05
21/05
31/05
10y Bund Source: ABN AMRO Group Economics, Bloomberg
sell-off was in full flow. The ECB’s projections show inflation just about reaching the target in 2017, at 1.8% compared to the its price stability goal of close to but below 2%. This means that the sell-off in the bond market could eventually threaten the ECB achieving its goal.
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Bloomberg: ABNM
Euro Corporate Weekly –
2
A false start - 05 June 2015
Bond yields & EUR are above ECB projections
again, we’ve seen sellers of the long end and buyers in the
In %
short end, thereby further steepening the credit curve. Short
1.7
dated paper is bought in every rating category. There seems to
1.6
be no clear preference for better rated or low-rated paper.
1.5
Flows were light though.
1.4 1.3
Supply on hold, longer tenors are no longer
1.2 1.1 12-May
The volatility also had repercussions for the primary market. 17-May
22-May
27-May
Most issuers stayed side-lined this week. Also because
1-Jun
Thursday was a public holiday in Germany. 10y Weighted avg yield (lhs)
ECB projection for 2015
Source: ABN AMRO Group Economics, ECB Staff forecasts, Thomson Reuters Datastream
We’ve only seen three transactions, all EUR 500mln sized deals. Only the Eurogrid had a ten year maturity and was
Total returns for credits have arrived in negative territory
priced at the tight end of the IPT. This is characteristic for the current market environment. After the McDonald’s 20 year deal
The phenomenal climb in in the Bund yields has had a devastating effect on total return for credits. The first blow to total return was in April, when an unexpected rise in yields took place. It pushed the 10y Bund yield to 0.77% before reversing.
got pulled, we haven’t seen any long tenors anymore. Investor appetite for long maturities has clearly evaporated with the increasing Bund volatility. Table 1 - iBoxx EUR IG Sector Performance
The subsequent announcement by Mr Coeuré in which he
Asset swap margin in bps
announced the ECB’s front-loading programme, restored total return slightly. However, in two days all gains were completely wiped out again.
04/06/2015
chg. week
chg. month
chg. YTD
Corporates
86
3
4
-2
Non-Financials
80
3
4
1
Non-Financials Sr.
69
3
3
-1
Non-Fins Sub
243
7
11
-32
Total returns for credit are in negative territory for the second
Non-Fins AA
45
3
3
2
time this year. Non-Financials gave a total return of
Non-Fins A
58
3
2
0
-1% year to date. In particular, bonds with a longer duration
Non-Fins BBB
107
3
4
-6
Non-Fins 3-5 year
53
-2
1
-5
Non-Fins 5-7 year
74
5
5
5
Non-Fins 10+
99
5
8
-1
have been hit. The Non-Financials 10+ year bucket gave a total return of -3.3% while the 3 to 5 year bucket is back at nil.
Automotive
79
2
3
14
Total return for Non-financials in negative territory
Basic Resources
97
5
1
1
In %
Chemicals
65
1
8
0
Construction
79
12
10
6
Oil & Gas
79
1
1
-33
Food & Beverages
61
4
3
10
Health Care
70
4
4
14
Industrial Gds & Serv
66
5
5
6
Media
88
1
-1
18
Personal & HH Goods
65
4
5
13
Retail
75
4
4
-25
Technology
48
5
7
8
Telecom
94
2
4
0
Travel & Leisure
85
-1
3
4
Utilities
92
3
5
5
2.50 1.50 0.50 -0.50 -1.50 01/01
01/02
01/03
01/04
01/05
01/06
Total return Non-financials Source: ABN AMRO Group Economics, Markit
Investors find a safe haven in short end of the curve Not surprisingly, with all this volatility investors are increasingly looking for assets that can withstand the turmoil. This week
Source: ABN AMRO Group Economics, Markit
3
Euro Corporate Weekly –
A false start - 05 June 2015
Table 2 – Recent benchmark Non-financial new issues Date 05/05/15 06/05/15 06/05/15 11/05/15 13/05/15 13/05/15 18/05/15 18/05/15 18/05/15 18/05/15 19/05/15 19/05/15 20/05/15 20/05/15 21/05/15 21/05/15 21/05/15 26/05/15 26/05/15 26/05/15 27/05/15 27/05/15 27/05/15 27/05/15 27/05/15 28/05/15 28/05/15 28/05/15 02/06/15 02/06/15 03/06/15
Size Issuer (m ln) Coupon REED ELSEVIER 600 1.30 PROLOGIS 700 1.375 FORD 500 1.114 WUERTH FIN 500 1.00 3M 600 0.95 3M 500 1.75 UNITED TECHNOLOGIES 750 1.25 ADECCO 500 1.50 MCDONALD'S 600 1.875 MCDONALD'S 800 1.125 ILLINOIS TOOL WORKS 500 2.125 ILLINOIS TOOL WORKS 500 1.25 GE CAPITAL 1250 1.25 GE CAPITAL 1250 1.875 CDP RETI 750 1.875 TRANSURBAN 500 2.00 ELECTRICITY SUPPLY BOARD 500 2.125 ELI LILLY 750 2.125 ELI LILLY 750 1.625 ELI LILLY 600 1.00 INMOBILIARIA COLONIAL 500 2.728 INMOBILIARIA COLONIAL 750 1.863 UNILEVER 500 1.00 AIR LIQUIDE 500 1.25 RCI BANQUE 750 1.25 EXPEDIA INC 650 2.50 TENNET 500 1.75 TENNET 500 0.875 MOHAWK IND 500 2.00 EUROGRID GMBH 500 1.875 MOTABILITY 550 1.625
Maturity 12/05/25 13/05/21 13/05/20 19/05/22 15/05/23 15/05/30 22/05/23 22/11/22 25/05/27 26/05/22 22/05/30 22/05/23 26/05/23 28/05/27 29/05/22 28/08/25 8/06/27 3/06/30 2/06/26 2/06/22 5/06/23 5/06/19 3/06/23 3/06/25 8/06/22 3/06/22 4/06/27 4/06/21 14/01/21 10/06/25 9/06/23
tenor 9.9 5.9 4.9 7.0 7.9 15.0 8.0 7.5 12.0 7.0 15.0 8.0 8.0 12.0 7.0 10.2 12.0 15.0 11.0 7.0 8.0 4.0 8.0 10.0 7.0 7.0 12.0 6.0 5.6 10.0 8.0
Source ABN AMRO Group Economics, Bloomberg/Bondradar,
IPT 85a 160a 80a 50/55 30a 75/80 65a 90/95 80a 55/60 100/105 65/70 65a 95a 140a 110a 115a 75/80 55/60 210a 170a 40/45 50a 80a 2.75%a 85/90 50/55 140/150 95/100 85a
Spd at launch vs MS 72 102 73 45 37 67 57 80 80 55 100 62 55 85 125 103 107 107 70 45 200 160 38 40 75 197 80 45 140 95 80
Final NIP* 12
05-Jun 80 107 75 33 44 68 54 82 97 55 110 73 53 70 120 103 110 103 73 42 210 154 43 45 82 189 87 45 130 91 68
PerforCounm ance Moody S&P Fitch try iBoxx class 8 Baa1 BBB+ BBB+ UK Media 5 Baa1 BBB+ US Real Estate 2 Baa3 BBB BBBUS Automotive -12 A DE Industrials 7 Aa3 AAUS Industrials 1 Aa3 AAUS Industrials -3 A2 A A US Industrials 2 Baa2 BBB+ CH Industrials 17 A3 ABBB+ US Travel & Leisure 0 A3 ABBB+ US Travel & Leisure 10 A2 A+ US Industrials 11 A2 A+ US Industrials -2 A1 AA+ US Industrials -15 A1 AA+ US Industrials -5 Baa3 BBB IT Utility 0 Baa1 BBB+ AAU Industrials 3 Baa1 BBB+ AIE Utility -4 A2 AAUS Health Care 3 A2 AAUS Health Care -3 A2 AAUS Health Care 10 BBBSP Real Estate -6 BBBSP Real Estate 5 A1 A+ NL Food & Beverage 5 A+ FR Chemicals 7 Baa3 BBB FR Automotive -8 Ba1 BBB- BBBUS Travel & Leisure 7 A3 ANL Utility 0 A3 ANL Utility -10 Baa2 BBB US Industrials -4 Baa1 DE Industrials -12 A2 A UK Industrials
4
Euro Corporate Weekly –
A false start - 05 June 2015
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