7th April 2020

↩️ Signs of a turnaround

iTraxx Main

96.5bp, -8bp

iTraxx X-Over

548bp, -47bp

🇩🇪 10 Yr Bund

-0.31%, +14bp

iBoxx Corp IG

B+240bp, -9bp

iBoxx Corp HY

B+735bp, -30bp

🇺🇸 10 Yr US T-Bond

0.77%, +10bp

🇬🇧 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″]

HY credit trying to have its moment…

Declining coronavirus-related death rates and talk of easing lockdown restrictions across several countries have given a big boost to markets. They will try and get ahead of the curve as much as possible, and if virus peaks are being reached across Europe (not yet in the US), then we must be looking to establish a floor for risk assets.

That’s important because we’re going to see the economic machinery haul itself back into action, albeit in measured form. That won’t stop investors piling back into the markets, as they attempt to front-run them and welcome greater levels of economic activity.

The IG primary market has already been extremely busy and we’re now seeing lower-rated, peripheral borrowers jump on the bandwagon very quickly. There was a hint emerging of indigestion last week, as deal subscriptions begin to decline, but the markets have been in fine form once again. All in investment grade.

Adding in the subsequent issue taps, March’s issuance was the second-best month since 2009 at €48.85bn. This month has already seen a massive €29.25bn printed and we have barely seen a week’s worth of business.

It’s been quiet in the high yield market, though. There’s not been a hint of a deal in 7-weeks in Europe. In the secondary market, there has barely been any trading activity. Spreads gapped 2-3 weeks ago, but have generally been tightening since as equities have appeared a little more sure of themselves. Visibility remains extremely poor though.

The bad news might be coming. We don’t know. All the news flow seems to be ‘big picture’ related. Auto sales have fallen off a cliff, for example, and the OEMs are busy lifting paper to shore up the balance sheets. In the little guy has seen his business effectively mothballed, needing bridge loans and the like to tide him over. There will be consequences.

Primary still dealing, big time

After €3.5bn of deals on Monday from Repsol, Naturgy and LafargeHolcim, we had another €7.2bn on Tuesday. The name of the game for the day was for less frequent borrowers with pricing rammed tighter as initial guidance levels were wide of the mark given the more limited pricing visibility.

Tuesday’s glut started with Veolia’s €700m, 8-year maturity offering at midswaps+130bp and the books at almost €6bn saw final pricing 50bp inside the opening guidance. Akzo Nobel came next with €750m in a 10-year at midswaps+165p which was 60bp inside the opening guidance off a €6.1bn book. Portugal’s EdP added €750m to the mix, in a 7-year at midswaps+180bp – a 50bp cut versus the initial guidance off a €5.7bn book.

Bouygues took €1bn in an 8-year at midswaps+125bp, or 50bp inside the initial chatter with book approaching €5bn. EnBW went for a 5-year no-grow €500m at midswaps+90bp, 50bp inside the opening talk and a book of €4.25b. We had the first cross-over name print, as Syngenta issued €500m as well, in a 6-year at midswaps+365bp (-35bp versus IPT) with books barely at €2bn.

Toyota issued in three tranches, with €750m in a 2-year at midswaps+185bp (-40bp versus IPT), €500m in a 4.5-year at midswaps+220bp (-20bp versus IPT) and €500m in a 7.5-year maturity at midswaps+235bp (-50bp versus IPT). Combined books exceeded €8bn. And finally, we had €600m in a 5-year at midswaps+150bp and €500m in a 10-year at midswaps+180bp, both from SSE PLC with books up at €2.7bn and final pricing 25-30bp tighter across the tranches.

Others deals had Deutsche Bahn issue €750m in a 20-year at midswaps+115bp, we had Ireland lift €6bn in a 7-year at midswaps+32bp and Slovenia take a combined €2.25bn across three tranches. last up was Cyprus with a dual-tranche effort for €1.75bn.

On the crest of the wave

The equity markets were on a charge for much of the session, but closed off the session’s best levels. There was no obvious driver although news of highest one-day casualties in both the UK and New York might have affected sentiment.

The FTSE managed to close 2.9% higher though, the Dax was 2.8% higher and the US indices were all over 2% higher at our close.

In rates, we had a massive pull-back. the 10-year Bund yield rose 14bp to -0.31%, the same maturity Gilt was at 0.41% (+9bp) and the Treasury yielding 0.77% (+10bp), as at the time of writing.

Credit index crunched lower as iTraxx Main dropped 8bp to 96.5bp and X-Over fell by 47bp to 548bp.

In cash, the improved tone and secondary market illiquidity saw spreads tighten quite materially. The IG index was 9bp tighter at B+240bp – and that despite the significant levels of supply still. The sterling market also tightened by 9bp but continues to broadly outperform.

There was some follow-through again into the AT1 market, leaving the index at B+1005bp (-90bp tighter) – which is now over 500bp tighter than the record wide seen two weeks ago.

Fallen angels, no supply, little real visibility and concerns from the macro impact on the sector didn’t prevent the Street from tightening up the market. The HY index moved 30bp tighter to B+735bp. We are a 170bp off the wides – much more of this and we will be back in a bull market!

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.