European IG index itraxx main was 6bp tighter w/w

What’s on our mind

- general credit market news

Risk sentiment was back on last week as the market was gearing up for the upcoming ECB announcement later this week. Despite somewhat volatile equity markets, credit markets remained fairly calm and the European IG index itraxx main was 6bp tighter w/w while the HY index (iTraxx crossover) was about 40bp tighter w/w.
We saw larger primary activity compared to the previous week. The market improved in both volumes and diversity of issuance as both core, periphery and non-European issuers entered the market.
European Court of Justice Advocate-General, Pedro Cruz Villalón, announced his opinion last week on the European Central Bank's OMT programme ahead of a ruling expected later this year by the court. Mr. Villalón found the ECB’s bond-purchase programme to be compatible "in principle" with European law, thereby contradicting the German Constitutional Court’s legal challenge and giving Draghi the green light ahead of this week’s expected QE announcement.
Due to expected portfolio rebalancing effects, we anticipate that the ECB’s announcement later this week will have a positive effect on corporate credit spreads going forward, even if the ECB decides only to include SSAs in the purchase programme to begin with.

Close of relative trade (‘Buy’ Stena 2020, ‘Sell’ Stena 2019)

The yield differential is no longer ‘very’ attractive between Stena 2020 and Stena 2019. Yield pickup between the bonds has narrowed to some 0.55% p.a. (compared with a start yield differential of 1.4% p.a. when the trade was suggested on 24 October 2014).
Following healthy relative performance since initiation in October 2014, we close out and take profit on our earlier trade idea (buy Stena 2020, sell Stena 2019).
Fundamentally, we like Stena and currently view the company as a ‘BB’ credit with moderately improving credit metrics short term (<2016) but flat to declining credit metrics longer term (>2016). Following the close of the trade, we keep our absolute ‘Buy’ recommendation on the Stena bonds/CDS
(see valuation chart later in this presentation).

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