6th October 2020

🗞️ He’s Back…And Don’t We Just Know It

iTraxx Main

54.1bp, -2.6bp

iTraxx X-Over

320.4bp, -12bp

🇩🇪 10 Yr Bund

-0.51%, unchanged

iBoxx Corp IG

B+123.7bp, -2.5bp

iBoxx Corp HY

B+460bp, -5bp

🇺🇸 10 Yr US T-Bond

0.78%, +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″]

Nerves of steel required…

Good news and the markets rise, bad news and they drop. ‘Twas ever thus, it’s not rocket science. However, the frequency of the headline risks and the subsequent risk on/off is the difference now. Unfortunately, it is about to become a little more volatile – to quite possibly last into the end of the year. Macro looks to be offering a slightly better near-term recovery dynamic, but the fragility is a clear and present danger as regional and/or national lockdowns dent the upward moves.

Generally, we think that the markets will go higher in the near term – whoever wins the US election. Near term, investors will trade on a narrative that Trump is going to retain the status quo if he wins. But also, a Biden administration would also serve to boost markets on anticipation of huge stimuli – especially if the Democrats win both Houses (likely). The problem is that markets will need a clear winner and no contentious issues after, and it is that uncertainty which is providing for much of the current jitters.

Credit investors are playing it with little change to their existing strategies. Money is still there to put to work and there is a solid, sustained and elevated bid for corporate bonds. Through primary. Secondary markets are seeing little or no action, and spreads have in the main been trading out in rangebound fashion across the various corporate classes.

Corporate treasury desks are still busy vacuuming up additional levels of liquidity, no doubt needing to be more concerned about having enough on board into what might be an uncertain 3-6 months ahead for macro. Primary markets, therefore, are in good shape and will continue to function through the quarter with little disruption – hopefully.

The tacit understanding remains. You print. We buy. Go out with cheap, unrealistic indications by all means and ram the final pricing tighter. But as long as we get our performance on the break, we won’t disrupt the status quo.

Busy primary, but light on corporate prints

Credit primary was busy but most of the deals were in the SSA and covered bond space. Still, much in the corporate sector is lined up for the rest of this week judging by the mandate announcements and ongoing investor calls.

There were, however, some good deals. Eni SpA probably topped them with a dual-tranche hybrid offering. They issued €1.5bn of a PNC5.25% priced to yield 2.75% and another €1.5bn to yield 3.375% in a PNC9 structure. Each tranche attracted interest of almost €7bn (!) and final pricing 50bp tighter than the initial guidance across each of them.

In financials, Nykredit took €500m in a PNC6 AT1 deal priced to yield 4.125%, with books up at €2.5bn and final pricing 62.5bp inside the opening talk, thus adding to the several deals already seen in the past couple fo weeks. A bit of incremental yield from decent institutions is much needed and Nykredit took full advantage (it seems, whatever the structure).

In the senior financials space, Argenta Spaarbank issued €500m of 6NC5 senior non preferred at midswaps+155bp (-15bp versus IPT).

Heathrow Funding: Back for £440m

Elsewhere, the EFSF took €4bn (2 tranches), the Flemish Community lifted €2bn, Yorkshire Building Society took €500m in a covered bond and Heathrow Funding was back, this time in sterling, for an increased £440m for a 9-year maturity at G+260bp (-40bp versus IPT).

US politics to drive markets in Q4

The ebb and flow that comes with US political uncertainty is the driver for the intraday and daily moves. With Trump seemingly recovering well and back in the saddle, reduced uncertainty for the moment is helping push markets higher.

There was a fourth consecutive monthly rise in German manufacturing as August notched up growth of 4.5% (3.3% in July), UK construction activity rebounded more than expected in September as the PMI jumped to 56.8 versus 54.6 in the previous month.

Heading into the afternoon session, Spain cuts official 2020 economic growth forecasts – anticipating a contraction of 11.2%  (-9.2% previously) and a budget deficit of -11.3% (unemployment to rise to 17%). Ouch.

The FTSE closed flat, the DAX added 0.6% and at the European close, US markets were directionless. There was another slight back-up in US rates, the 10-year benchmark Treasury yield rose to 0.78% (+2bp), the Bund yield though was unchanged (at -0.51%) and the Gilt in the same maturity likewise didn’t budge, left at 0.29%.

Powell was on the tapes appealing for fiscal support saying too little would see a weak recovery and the risks of overloading were smaller. In the same vein, Lagarde was suggesting the same, pleading for greater levels of fiscal intervention across the Eurozone. Those Maastricht criteria are well past their sell-by date!

In credit index, protection costs declined once again and iTraxx Main moved 2.6bp lower to 54.1bp with X-Over 12bp lower at 320.4bp.

Cash also duly obliged, although there wasn’t much going on to write home about. Still, the IG iBoxx index squeezed some – and all of a sudden, all of September’s ills were forgotten, or forgiven. The index was at B+123.7bp, at the close, -2.5bp tighter. There was less of an upside for the HY market, the index at B+460bp (-5bp) at the close and that more modest tightening was reflected in other high beta markets.

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.