28th May 2020

📈 Record Month for IG corporate Issuance – Again

iTraxx Main

69.8bp, -1.8bp

iTraxx X-Over

415.5bp, -16bp

🇩🇪 10 Yr Bund

-0.43%, -1bp

iBoxx Corp IG

B+176bp, -2bp

iBoxx Corp HY

B+577bp, -10bp

🇺🇸 10 Yr US T-Bond

0.70%, +2bp

🇬🇧 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″]

The walking dead? Naah…

We’re at the end of May, and it’s been a good month. Recovery has set in (almost everywhere). We’ve bottomed in macro with lockdowns easing and economic activity is off the floor. Asset prices are rising and whether that’s justified or not, investors are adding risk in the expectation that we have a ‘V-shaped’ or some kind of ‘jagged Nike swoosh-like’ recovery trajectory. Over-valued? Perhaps, but we wouldn’t fight against financial liquidity.

The FTSE has added almost 5% in May, the Dax more at around 8%. The S&P is back above 3,000 and closing on 3,100. In credit, primary issuance levels are unprecedented in Eurobond market history, with a record run-rate taking us to €210bn issued in the period to end May – with over €110bn of that coming in April/May. May’s IG non-financial issuance – with a session to go – is a record €57bn, ahead now of the previous record, by €50m!

And performance has recovered. The IG market’s total return is flat for May, the AT1 market has returned +3.6% and European high yield +2.6% (spreads -77bp, all Markit iBoxx index).

The unknown, in a sense, is the impact that we will get from the stimulus packages. Of course, equities are overvalued, credit spreads are probably too tight and so on. But there are hoards of cash looking for a home. The decade-long inflating of the asset bubble has legs in it yet. The puncture, in April, has been repaired and the newly developed sticking plaster will hold through 2020, in our view.

IG primary record – at the death!

We still have a session to go, but the IG non-financial issuance has reached a fresh milestone. After the record issuance seen in April, which smashed the previous record by €8bn, coming in at €56.95bn for that month, May’s deal flow has exceeded it. That is against ALL expectations. Better, over 90% of the deals are trading tighter than re-offer.

So in the IG market, French-Italian ophthalmics group EssilorLuxottica lifted €3bn across three tranches. They took €500m in a 3.6-year at midswaps+55bp (-50bp versus IPT), €1.25bn in a 5.6-year at midswaps+70bp (-35bp versus IPT) and a further €1.25bn in an 8-year at midswaps+75bp (-40bp versus IPT), with books in at almost €11bn across the tranches. Great deal.

The other IG borrower in the session was BASF which took €1bn in a 3-year at midswaps+40bp (-35bp versus IPT ) and €1bn in a 7-year green bond at midswaps+50bp (-40bp versus IPT). Books here came in at €7.2bn.

In the subordinated debt bank sector, Commerzbank issued €750m in a 10.5NC5.5 deal priced at midswaps+435bp, which was 55bp inside the opening talk with books up at an impressive €5.2bn. Credit Agricole also issued €750m but in a 10NC5 subordinated Tier 2 structure at midswaps+190bp (-40bp versus IPT), with books at €3.4bn.

And we had a high yield offering, with Austrian group Wienerberger printing €400m at 2.875%. €5bn of HY issuance in May, that’s a good recovery. Finally, Pearson group issued £350m in a 10-year social bond at G+355bp (-45bp versus IPT).

Higher, tighter and so on

Preliminary updated readings for US GDP for Q1 came in at -5.0% versus -4.8% expected, but core durable goods orders for April declined by less than exceed at -7.4% (-14.0% expected). Core PCE prices rises came in at 1.6% (1.8% expected). And new jobless claims topped 40 million since the crisis began, as another two million people applied for benefits in the last week. China formally approved plans to impose national security laws on Hong Kong. Let the battle commence.

Anyway, it was a case of onwards and upwards for equities, or tighter in credit spread markets. They are chipping away at the catastrophic losses encountered since late March. The FTSE closed 1.2% higher. The Dax, impressive all week, added yet another 1.1%. The S&P was trading at around the 3,050 level as at the European close (+0.4%).

Rates had a steadier session, doing very little and closing close to unchanged. 10-year Gilt yielding 0.20%, Bund at -0.42% and US Treasuries at 0.70%.

Credit protection costs declined some more. iTraxx Main laboured though to 69.8bp (-1.8bp) while X-Over was 16bp lower at 415.5bp, while the ratio between them has dropped below 6, now at 5.95 (was over 6.1 earlier in the week) highlighting compression between high and low beta credit protection.

It was a similar story in the cash market. The IG iBoxx cash index edged 2bp to B+176bp but we barely saw a move tighter in the CoCo market, with the index just 2bp tighter at B+740bp. The HY index though was 10bp tighter at B+577bp.

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.