16th July 2020

💧 Market Liquidity, My Friend, is Your Friend

iTraxx Main

61.6bp, +0.4bp

iTraxx X-Over

367.5bp, +1bp

🇩🇪 10 Yr Bund

-0.46%, -2bp

iBoxx Corp IG

B+145bp, -1bp

iBoxx Corp HY

B+511bp, unchanged

🇺🇸 10 Yr US T-Bond

0.61%, -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″]

Beginning to see the light…

The S&P is now dipping in and out of the black for 2020. The bank earnings season is off to a flyer, markets basking in a brighter than anticipated start to the season as the big US banks deliver. While a cautious tone persists generally on the medium-term outlook, markets are looking at the glass as being half full. We’d say, though, that the big driver for any upswing is the potential for success on Covid-19 virus vaccines. We’re just waiting for Trump to take credit for it.

Risk assets have made a good pricing recovery of late. We’ll take all that for now. Because we are all too aware that the market can reverse direction just as quickly. For instance, the charge sheet/grievances against China, already quite large, is growing and the sanctions/reprisals are taking a sinister turn. The next headline out of China in terms of a response to the UK’s Huawei decision, or some sanction against the US might be a trigger, for example.

While we wait for that, macro is beginning to show that activity has lifted itself off the floor. June was all about dusting down after several months of hibernation, July onwards ought to be about getting the dynamics of growth back into place. The first in/out of lockdown was the Chinese economy and the rebound is evident, as Q2 GDP growth of 3.2% (YoY, 11.5% QoQ) beat expectations.

We shouldn’t get carried away with it all. But the more constructive bias of the market makes sense. Many will point to valuations being very rich, but historical comparisons don’t really cut the mustard. Historically, we haven’t had to contend with such massive levels of liquidity having been injected into the financial system. hence, we think the more lofty valuations are here to stay.

There is a big lack of volatility in fixed income. there’s a dumbing-down effect with the bond markets now commoditised as they head towards some kind of Japanese-like zombification. Investors are scrambling around for yield.

We don’t get too many 10% coupons European high yield. In fact, before British-US cruise ship operator (!) Carnival Corp bit the bullet on a €425m  5.5NC3 offering on Wednesday costing 10.125%, the last borrower to do so since 2017 was Montichem HoldCo (€150m, 7NC3, 10%) back in September 2019.

The Carnival deal in itself hadn’t ought to signal much by way of coaxing other similarly particularly ‘credit-challenged’ borrowers to chance their arm – European issuers won’t do it. But there is no denying the significant appetite for high coupon, high-risk corporate debt.

In Thursday’s session, Gamenet got away its deal taking the form of a €300m 5NC1 floater at Euribor+600bp and €340m of a 5NC2 structure to yield 6.25%. With just over a week to go before the end of the month, July’s HY activity sits at €6.5bn, representing a good response to the re-opening of this market over the past couple of months. We’re up at €47.7bn year to date for HY issuance.

Mixed, but prices skewed to the upside

There hasn’t been too much activity in the market this week. Primary markets have been very subdued with just a handful of deals on the screens. That’s not too much of a surprise given what we have seen through Q2, but we also had Bastille Day and the ECB to contend with this week – as well as the beginning of the Q2 earnings season’s reporting.

As for the ECB, they held steady in their monthly meeting with key rates all unchanged and no adjustments deemed necessary to the size of the bond-buying programmes. Lagarde later suggested that the recovery is in the early stages and uneven across the various sectors and jurisdictions. The next job is for the EU to agree that pandemic recovery package – the summit kicks off on Friday.

In the US, weekly jobless claims were stubbornly high at 1.375m (1.435m the previous week), and continuing claims dropped to 17.4m. Retail sales however recovered well in June, jumping by 7.5% versus May (and ahead of the 5% forecast). The Philly Fed Manufacturing index likewise showed recovery up at 25.1 against expectations of 20.

Morgan Stanley and BofA both played into the upbeat bond trading narrative which is boosting earnings as it beat expectations, although reserves for future loan losses rose sharply for the latter. J&J’s Q2 net fell by 0ver 30%, but the market wasn’t too swayed by it given the medical devices division being impacted by delays in operations and the company increased full-year revenue expectations.

So overall a mixed bag, but the accent more to the upside and this will help risk markets. For Thursday’s session, we saw a moderate weakness in equities, the FTSE off by 0.6% and the Dax by 0.4% with the US markets around 0.5% lower at the European close.

In rates, the UK 10-year Gilt yields dropped to 0.14% (-2bp), the Bund yield fell a touch to 0.46% (-2bp) and as at the time of writing, the Treasury was at 0.61% (-2bp).

Credit index wasn’t exciting, with the indices close to unchanged at the close, leaving Main at 61.6bp and 367.5bp.

In cash, the market was better bid for choice leaving the iBoxx IG cash index at B+145bp – and the tightest level in exactly a month (the index has been as high as B+157.7bp in the interim). The AT1 market was unchanged with the index left at B+700bp at the close. The high yield market likewise was a dearth of activity, the index unchanged at B+511bp (also the tightest level in a month).

On a housekeeping note, we’re having a short break and will be back next Thursday. 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.