16th June 2020

🍾 Whatever it takes

iTraxx Main

64.3bp, -6.1bp

iTraxx X-Over

365.6bp, -37.4bp

🇩🇪 10 Yr Bund

0.42%, +2bp

iBoxx Corp IG

B+144bp, -10bp

iBoxx Corp HY

B+514bp, -27bp

🇺🇸 10 Yr US T-Bond

+0.75%, +5bp

🇬🇧 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″]

And the markets like it, a lot…

Was that the sound of corks popping? The Fed is going to be buying corporate bonds. US retail sales bounced 18% higher in May (core by 12.4%) and well ahead of expectations. And there is talk of Trump possibly announcing a $1trn Federal infrastructure spending programme. Like discovering a miracle drug, the risk-market junkie has just had another fix.

The financial markets’ day of reckoning will come, probably. But it has been like that for the best part of a decade. The message remains, don’t fight the Fed. Powell didn’t need to buy corporate debt – spreads are relatively tight and the market isn’t broken. But just that action alone had succeeded in quashing the downside for now.

US equities should be looking at record levels soon (we suggested as much previously). Credit spreads will crunch tighter – and supported further if the ECB announces the adding of buying fallen-angel risk. Thus the super performance since credit hit the depths in mid-March has much more to go. For instance and looking at the synthetic market, if iTraxx Main’s next stop is, say, somewhere in the 40bp – 50bp range, then X-Over will be staring a 250-300bp level in the face.

The US central bank won’t run out of ammo as such although the quality of it is declining and could potentially become less potent. We are quite sure they will be buying equities directly at some point in the future. In a way, it’s always been a race to the bottom with the problems of the financial crisis of 2008 never really fixed. The bubble has more legs in it yet.

The ECB and the BoE have done it by the bucket load, and now the Fed is directly buying investment grade corporate bonds. It will serve and has served to boost the financial markets because the intent is there and investors will feel confidence from that support for the market. It has been felt immediately and has gone some way in masking the concerns we might have been having on the second wave virus outbreaks affecting may cities/countries across the world.

So with that Fed action under our belts allied with the other tidbits of data and headlines, the market was in rally mode with equities leading the charge buoyed by the better closes in Asia overnight from the start.

Previous credit weakness came to an abrupt halt and we had some tightening in spreads much overdue after a week or so of constant weakness. News that the ECB was considering, or weighing up, buying fallen angel corporate bonds (sub-investment grade-rated debt) might add to the ‘race to the bottom’ narrative – but would serve to fuel the rally.

Primary reopens after an extended lull

Credit primary perked up, as a host of borrowers took the opportunity to visit the market. The hiatus came to an abrupt end. There was something in the day’s offerings for everyone.

In non-financials, CapGemini issued a dual tranche equally split €1.6bn in a 5-year at midswaps+95bp and a 10-year at midswaps+130bp. Books came in at a sprightly, combined €9bn and final pricing was 40-45bp tighter across the tranches versus the guidance.

Amcor followed up with €500m of a 7-year at midswaps+145bp (-45bp versus IPT), as Carlsberg issued €500m of its own also in a 7-year at midswaps+70bp (-45bp versus IPT, €3.25bn book)). Coca-Cola tapped it 1.5% Nov 2027 issue for a further €250m at midswaps+85bp (-15bp versus IPT).

We finished off with crossover rated-credit Cellnex tapping its April 2025 issue for a further €165m at midswaps+170bp (-40bp verged IPT) and adding €750m in a new 9-year deal at midswaps+215bp (-60bp versus IPT), with combined books at around €4.3bn.

Wholly state-owned Deutsche Bahn lifted €850m in a 9-year at midswaps+55bp (-25bp versus IPT) and €650m of a 19-year at midswaps+85bp (-25bp versus IPT).

There was a REIT flavour to the day’s deals, with Alstria Office issuing €350m of a no grow 6-year at midswaps+180bp (-45bp versus IPT), while France’s Covivio taking €500m also in a no grow at midswaps+180bp for a 10-year (-40bp versus IPT). For the insurance sector, La Mondiale issued €500m of an 11-year Tier 2 at midswaps+225bp (-45bp versus IPT).

In banks, AIB went the CoCo route, with a €625m AT1 offering priced to yield 6.25% for the PNC5.5 deal. Books topped €5bn and 75bp was lopped off the initial guidance into the final pricing. Lloyds Bank went the sterling route with a £500m 3-year at G+155bp.

Rising tide lifts all boats

The initial rally came courtesy of the Fed bond-buying effort, and the ECB added to it as it emerged they are looking into buying those fallen-angel bonds. The German Zew economic sentiment indicator perked up, coming in at 63.4 (up from 51 previously and better than the 60 expected).

The furlough scheme prevented much worse numbers on the UK unemployment front, but poorer data is to come. The rate remained steady at 3.9% but job vacancies and payrolls plummeted in the 3 months to end May, and hours worked dropped sharply. However, we don’t think UK markets will shift too much away from the average moves elsewhere over the summer months, given the investors fully expect a dire set of numbers to come.

We had geopolitical issues to contend with as well. Skirmishes on the disputed Himalayan border between China and India have led to three Indian soldiers being killed, while on the Korean Peninsula, Kim Jong-il was busy blowing up a ‘liaison office’ on its side of the border in response to deterring a leaflet dropping campaign by dissidents in the South.

But the Fed – and then later the US consumer (retail sales), came to the rescue. Of course, there’s much to be concerned about but we’re back in the mood to swat those worries aside and drive risk markets higher. That infrastructure programme will have seen the bears capitulate.

So equities closed 3% or higher in Europe, with the FTSE adding 3%, the Dax 3.3% and the US markets were up by 2% or more, as at our close, coming off earlier highs following Powell’s prepared Senate testimony on the risks to the outlook.

Rates were only a little weaker, such that the yield on the 10-year benchmark Bund backed up to -0.42% (+2bp), the Gilt yield rose to 0.22% (+2bp) and the 10-year Treasury to 0.75% (+5bp).

In the synthetic market, credit protection costs declined sharply. iTraxx Main crunched 6.1bp lower to 64.3bp and X-Over to 365.6bp (-37.4bp) and the ratio between them dropping a touch to 5.68x.

And finally, secondary cash squeezed tighter leaving us with the first good ratchet in spreads in over a week. The iBoxx IG cash index moved 10bp tighter to B+144bp. It was a 55bp squeeze in the AT1 market and the index spread tightened to B+650bp.

The high yield market got its boost as well, buoyed in addition by possible ECB buying of fallen-angel debt and left at B+514bp on the index, 27bp tighter in the session.

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.