The market has done pretty well this week (basically flat now) despite the turmoil in Cyprus and fears of contagion. So why are investors so complacent? Some could argue that investors in general are ignoring risks and continuing to buy stocks as they see signs of the US economy improving. Suki Mann, Societe Generale has a different take. He believes that markets have been calm due to ‘market manipulation’ (Ben Bernanke seems to be the culprit in this case).The report from Below is a short piece from Mann which SocGen put out yesterday.
H/T Matthew Boesler
Fantastic. The market reaction to the crisis in Cyprus. There is no other way to describe it. Peripheral government debt is holding firm, equity indices have zoomed past the moon, safe-haven bonds have rallied (just in case) and corporate credit walks on by, merrily. It’s one thing injecting massive liquidity into the global financial system allowing for easier refinancing of obligations across all parts of the economy, ensuring easier debt servicing and sustaining a low default rate in the midst of a great economic downturn. It’s another when we almost completely ignore Cyprus, its potential for a eurozone exit and the non-trivial probability that such an event would unleash massive contagion.
We’ve been here before many times over the past few years, a ‘solution’ has always been found. But the brinkmanship is at a new level, the political will to help do whatever they have to is more questionable and, into it, the Cypriots are gambling on receiving 93c on the dollar (original deal) versus losing say 93c (if it all collapses). Liquidity hides many ills, but is the power of zero (returns from cash) that great? In credit, we buy risk where the corporate entity is in fundamental decline. We become yield hogs and add paper that we would never dare look at previously. Ratings downgrades (and transmission risks) do not matter. As long as the potential for default is very low, the yield of the product wins out.
There’s been massive manipulation of the markets, it’s given risk asset performance a huge boost for the best part of nearly two years, and we are sure there’s more to go. We are, after all, in Japanification territory. Right now, our concerns mean we’d be sidelined until the Cyprus situation plays out. Most are anyway.
So primary markets continue to shrug off any worries and new deals continue to emerge as the new issue market remains the most active segment of the credit markets. VW set the pace with two deals raising €1.25bn with a long 3-year bond at MS+37bp and €750m with an 8-year bond at MS+67bp, making it €3.75bn already raised this year in the capital markets. In the HY space, we had Ziggo raise €750m with a 7-year senior secured bond at MS+240bp and UPC raised €450m with a 10NC5 bond as part of a dual tranche deal which also saw a 10NC5 CHF bond issued while Storebrand was set to come with a €300m 30NC10 bond yielding 6.875%. The deals helped IG volumes to total €16.6bn this month, one of the best totals for March since the inception of the single currency, while HY is already posting the best Q1 we’ve ever had. On the financial side however, it was another blank as the last deal we had was the BFCM 19 of last week. Peripherals also remain absent and we don’t expect to see any new deals from them until the Cyprus question is resolved.
Secondary activity was very light, highlighting the wait and see attitude of most. Peripheral corporates were a touch tighter in general, but elsewhere spreads were mostly unchanged amid very light flows. Financials saw T1 bonds up by a small amount, 0.25 points for most with some retail and fast money buying while senior bonds saw very quiet flows and spreads remained largely unchanged for both core and peripheral issuers.
Finally, synthetic indices were relatively busy with the roll dynamics, although spreads were fairly stable throughout the day. We are closing with the new S19 Main at 118.375/118.875bp (+0.125bp), the X-Over at 474.75/476.75bp (-1.25bp), the Senior Financials at 167.25/168.75bp (-1.125bp), and the Sub financials at 281.125/286.125bp (-1bp).
Suki Mann, Societe Generale, Credit Strategy