2nd June 2020

🗞️ Spreads continue on path of least resistance: Tighter

iTraxx Main

67bp, -3.3bp

iTraxx X-Over

385.1bp, -26.8bp

🇩🇪 10 Yr Bund

-0.41%, +1bp

iBoxx Corp IG

B+169.7bp, -3bp

iBoxx Corp HY

B+550bp, -12bp

🇺🇸 10 Yr US T-Bond

0.67%, +1bp

🇬🇧 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″]

Summer of (dis)content…

It was a pandemic-driven, panic-stricken and exacerbated by secondary market illiquidity decompression between high and low beta corporate credit spreads at the end of March. After gapping to give over 600bp worth of spread difference between the HY and IG iBoxx cash indices, a couple of months on and we are now at 380bp. There’s another 50bp – 100bp in that trend over the next few months.

The world’s economy is re-opening. Confidence is gradually returning. Stimulus packages have flooded the financial system with copious liquidity and the ECB is possibly going lavish more this week. It needs a home.

The rising tide lifting all boats is likely going to take us through the summer months, underpinning some sort of recovery in risk asset prices. That leaves equities higher for choice, rate markets treading water and credit spreads tighter with high beta risk most likely outperforming.

HY versus IG compression takes hold


The risks are lurking, as ever, and especially in the form of a ‘rest of the world versus China’ in its condemnation  – with sanctions of some sort to come – of the latter’s smothering of Hong Kong. And even while COVID-19 virus vaccines and the like are in the pipeline, markets will still probably fret about any second wave into Q4. Not now.

Primary returns in style

Credit primary drew a blank on Monday owing to the Whit break, but it was back with some gusto on Tuesday and that will follow through Wednesday, before the ECB meeting and Friday’s non-farm report pretty much bring credit primary markets to a premature close for this week.

There was a heavier than usual financials flavour to the flow of deals – as well as a higher beta nature to them. Standard Chartered kicked off with a 10NC5 Tier 2 €1bn offering at midswaps+280bp, which saw interest pitched at €5.25bn and final pricing 40bp inside the initial talk. OP Corporate Bank also took €1bn in a 10NC5 structure at midswaps+200bp (-30bp versos IPT, books under €2bn).

In the senior space, Nykredit went for €750m in a senior preferred in a long 5-year at midswaps+90bp (-25bp versus IPT). MUFG issued €500m in a 4-year maturity sustainability bond, priced at midswaps+128bp (books €2.7bn). And Deutsche Bank was in for €500m in a 6NC5 senior preferred structure as well, therein issue priced at midswaps+167bp (-33bp versus IPT, books €4.5bn). In sterling, Credit Suisse issued £750m in an 8NC7 at G+223bp (-17bp versus IPT).

In the non-financial corporate bond sector, investment grade and high yield investors would’ve been all over the Repsol hybrid deals (high double-B rated). The borrower issued €750m in a PNC6 structure to yield 3.75% (-75bp versus IPT) and a PNC8.5 structure to yield 4.25% – which was a massive 87.5bp inside the initial talk. All that was made possible on combined books showing interest of €11.5bn.

The airline industry might have been battered by the coronavirus, but there was no stopping investors getting involved in the triple-tranche Airbus offering. The borrower took €3.5bn across three tranches on the last day of March. It was back for €1.25bn in a 6-year at midswaps+165bp, €1.25bn in a 10-year at midswaps+180bp and €1bn in a 20-year at midswaps+230bp. The combined books came in at over €15bn, and final pricing was 40bp – 50bp tighter versus the initial talk, across the tranches.

Finally, Hungary issued €1.5bn in a 15-year green deal, at midswaps+190bp (-50bp versus IPT, books of €7.25bn).

Markets look to the bright side

The rioting across the US has failed to noticeably dim the lure of risk. The China/HK situation is similarly failing to derail markets. Instead, they are focused on recovering lost ground as economies reopen. We might not get to the pre-coronavirus highs – in fact, we won’t. However, markets will have a good stab at regaining a good portion of those losses, into economies flooded (but propped up) with tens of billions of loans and other financial liquidity.

Elsewhere, the ECB reported that it had effectively bought up all of Italy’s debt issuance in April and May (over €50bn) in what will be seen as a financing operation too far, and is sure to stoke the ire of the German constitutional court. This must be a case of watching this space.

Anyway, with previously closed European markets reopening on Tuesday, they were largely in catch-up mode – and a bit more, with the Dax gaining 3.7% being the clear outperformer. It added 429 points with some cheer that the loan to Lufthansa had been rubber-stamped by the EU. The index is ‘only’ 9.3% down year to date now. A good week’s work away from flat?

The FTSE added another 0.9% and at the European close of play, the US markets were up to 0.5% in the black as well.

Rates didn’t do too much, the yield in the benchmark Bund at -0.41% (+1bp), the Gilt at 0.22% (+2bp) and the US Treasury at 0.67% (+1bp).

In credit, we had another tightening session. The cost of protection continued to fall, with iTraxx Main now down at 67bp (-3.3bp) and X-Over at 385.1bp (-26.8bp). The ratio between  X-Over and Main also continues to show compression, now at 5.75x.

As for the cash market, spreads were tighter again with the IG iBoxx index 3bp tighter at B+169.7bp.  The AT1 index only edged better, to B+746bp (-15bp) and now just over 50% tighter than the level seen at the peak of the virus wide. And finally, the HY index was marked at B+550bp (-12bp).

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.