18th May 2020

🌅 And the outlook is bright(ening)

iTraxx Main

83.8bp, -6.8bp

iTraxx X-Over

499.2bp, -41bp

🇩🇪 10 Yr Bund

-0.47%, +6bp

iBoxx Corp IG

B+206bp, -1bp

iBoxx Corp HY

B+666bp, -10bp

🇺🇸 10 Yr US T-Bond

0.71%, +7bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”24″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

Economic engine revving up…

Markets are looking at that glass as half-full. As the world economy begins to re-open and we generate greater levels of activity, the hope is that we are picking ourselves up off the floor and moving on – in a sustainable upward trajectory. The data through May will be dire, but in a sense, it will be backward-looking. There will be the headline and other risks that markets will have to contend with for months to come, but there is a good chance we can mostly trend higher in risk valuations.

Anyone who thought that we might see less in credit primary (and that includes us), already running at a record pace in the IG market, was simply just wrong. We had another bluster of deals to contend with. It appears that few are being put off by the moderate change in dynamics (high supply still but lower new issue premiums, smaller subscriptions and edgier performance levels).

We can expect a couple of busier sessions given the holiday across Europe on Thursday which will put paid to any activity on Friday. Another record month for IG issuance is in the balance. Otherwise, news that Covid-19 vaccines are possibly on the horizon, antibody testing is going to happen en masse and those economies are beginning to re-open suggests that we could see out a decent May after all.

Primary offers up a gem

Playing into the narrative and the huge equity market rally, as ever, the corporate sector was full-on again in primary. Swiss luxury goods group Richemont added three tranches, we had two from Continental AG and Equinor while Volvo was also prevalent. Intesa San Paolo was there for the senior bank debt sector, lifting €1.25bn in a 5-year senior non-pref at midswaps+245bp (-25bp versus the initial talk).

The total year to date, after Monday’s flow of almost €6bn for IG non-financial issuance, is up now at a quite stunning €195bn! For the month to date, we now exceed €42bn (versus April’s record €57bn).

IG Issuance by month

Continental’s final terms saw it issue €750m in a 3.5-year at midswaps+255bp and another €750m in a long 6-year at midswaps+295bp. Both deals were priced 40bp inside the initial talk and combined books came in at just over €6.5bn.

Richemont issued €500m in an 8-year at midswaps+95bp, €850m in a 12-year at midswaps+120bp and €650m in a 20-year priced at midswaps+165bp. The deals were priced 30bp – 40bp inside the initial talk across the curve, with final books up at a combined €6.5bn. Mostly Norwegian state-owned Equinor went for a dual-tranche deal as well, with €750m in a 6-year at midswaps+110bp (-30bp versus IPT) and €1bn in a 12-year at midswaps+150bp (-40bp versus IPT). Total books were at €9bn.

The last of the bunch in euros was Volvo, with €500m in a 5-year maturity at midswaps+198bp (-27bp versus IPT, books €1.7bn). In sterling, we entertained Eastern Power Networks’ £300m, 15-year deal at G+145bp (-15bp vs IPT). Achmea was the other issuer in the market.

Let the good times roll

Markets rocketed higher, giving us the best day for equities at least for many weeks. The FTSE closed 4.3% higher, the Dax 5.7% and US markets were over 3% higher as at the close in Europe. All because economies were back up and running, vaccines were being mooted, the virus-related daily death levels were declining and with those lockdowns easing, markets are looking for better climes come the second half.

In the UK, it was reported that the BoE chief economist was looking at negative rates as well as the potential for buying riskier assets. It won’t take much given that they are already at 0.1%! The weekend reported skirmishes between the chief Brexit negotiators suggest that the odds are tipping in favour of a no-deal exit. That will also provide ammunition for policymakers.

All of that did help Gilts outperform against the backdrop a weaker environment for government bond markets. The yield on the 10-year Gilt rose by 2bp to o.25%, the Bund yield in the same maturity rose 6bp to -0.47% and in the US, the Treasury was yielding 0.71% (+7bp).

The moves in credit protection reflected the more optimistic tone across the markets and cost of protection ratcheted lower. The iTraxx Main index dropped 6.8bp lower to 83.8bp and X-Over moved a massive 41bp lower to 499.2bp.

In the cash market, the weekly report from the ECB showed that the CSPP had grown by €2.3bn last week and their holdings of IG corporate debt now touches €212bn. The Street should have been confident and clearly opportunistic to tighten up the market during the day into that news and the generally better tone. They didn’t do much in the end.

The moves were limited, such that the recent weakness we had seen in the cash market registering only a limited reversal in spreads. The IG iBoxx index edged better to B+206bp (-1bp). The sterling market closed unchanged at G+215bp.

The AT1 didn’t register much, effectively unchanged with the index at B+949bp (-8bp), meagre returns with equities so much higher. The number of the beast is where the high yield market ended, the index at B+666bp (-10bp).

Have a good day.

Suki Mann

A 30+ year veteran of the European corporate bond markets and in his role as Credit Strategist, Dr Mann has been ranked number one in the Euromoney Investor Survey eight times in ten years. Previously with Societe Generale and UBS, he now shares views of events in the corporate bond market exclusively here on CreditMarketDaily.com.