17th June 2020

🎶 The music just keeps on playing

iTraxx Main

64.5bp, unchanged

iTraxx X-Over

371.8bp, +6.2bp

🇩🇪 10 Yr Bund

-0.43%, +1bp

iBoxx Corp IG

B+146bp, +1.5bp

iBoxx Corp HY

B+514bp, unchanged

🇺🇸 10 Yr US T-Bond

0.74%, -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 content…

The early June wobble over, the markets are back in full swing with the glass being viewed as being half-full. The temptation might be to put some shorts on, but lurking is a policy response to any (impending) weakness, that the upward momentum is soon re-established.

Right now, it’s about not fighting the Fed. Next up the ECB will most likely buy sub-investment grade debt (junk in other words), and the BoE will expand the size of its QE programme this week – and might take in corporate debt again (they don’t need to, this market isn’t broken).

Credit in the meantime regains a bid and corporate bonds are only going to become more in demand. Secondary liquidity is a busted flush and spreads will tighten (probably disproportionately) for sure. Primary will flourish (June already threatens to be the third successive month of IG non-financial which exceeds €50bn), corporates will beef up balance sheets with the abundance of cheap liquidity, and they go on waiting for that rainy day. It’s been 10-years… and counting.

The midweek session furnished corporate bond investors with a flurry of deals as the primary sluice gates opened. Some of the borrowing is opportunistic, some of it is necessary (rebuild balance sheet strength – BP hybrid, for example), but all of it is being welcomed. Cash inflows need that home and until we get a more serious financial system crisis – a noticeable jump in the default rate to go with it – the credit market is looking good for another extended period.

The ructions elsewhere will feed into confidence. If second-wave virus lockdowns become the norm (and widespread) to disrupt economic activity, of course, equities will take a hit and credit will feel the heat. Geopolitical flare-ups need to be just that – we could do without any significant escalations. For a while now, that’s just about been the case. So we tend to ignore them.

Trump is a clear and present danger, always. But we know that he will try and engender growth and higher stocks until November (at least) as it would do his re-election chances the world of good. So, as far as his administration can muster, policy profligacy will be assured. Markets will react to it.

Primary: Who would have thought that?!

There was a mass of deals, mostly in the IG non-financial sector. The day took in €13.4bn of IG non-financial issuance and the total for the month to date rose to €33.6bn. We thought €40bn would be the maximum for the month, but that looks like being passed this week or very early next. As suggested earlier, we would not discount June’s IG non-financial issuance making it the third successive one with €50bn issued.

Prizer-backed and soon to be called Viatris issued €3.6bn in a 4-tranche effort. The first was for €750m in a 2-year at midswaps+115bp (-35bp vs IPT), followed up by another €750m in a 4-year at midswaps+135bp (-35bp vs IPT). They issued €850m in a 7-year at midswaps+160bp (-35bp) and €1.25bn in a 12-year at midswaps+195bp (-40bp vs IPT). Combined books were up at €40bn.

DSM issued €500m in an 8-year maturity at midswaps+50bp and €500m in a 12-year at midswaps+75bp. Both deals were priced 35bp inside the initial chat on combined books of €3.75bn. Italgas was one of two single-tranche issuers, lifting €500m in a 5-year at midswaps+72bp (-33bp versus IPT) with books at €1.7bn. The other was Conti-Gummi which printed €625m of a 4.25-year at midswaps+155bp (-30bp versus IPT).

The other 4-tranche effort came from Infineon. The German-based chipmaker printed €750m in a 3-year maturity at midswaps+115bp (-45bp versus IPT), €750m in a 6-year at midswaps+150bp (-50bp) and €750m in a 9-year at midswaps+190bp (-45bp versus IPT). They also went for a 12-year, €650m offering priced at midswaps+220bp (-55bp versus IPT). Final books were at around €16bn.

And then BP, the oil giant, was busy shoring up its balance sheet/credit quality with three dual currency hybrid offerings. They issued a huge €2.5bn of a PNC6 to yield 3.25% and €2.25bn of a PNC9 to yield 3.625% while £1.25bn was issued in sterling in a PNC7to yield 4.25%. Final yields were 25bp – 37.5bp tighter versus the initial talk across the tranches, and books came in at €16bn (combined) and £4bn for the deals.

In the senior bank market, we had deals from Virgin Money for €500m in a 5NC4 priced at midswaps+325bp (-25bp vs IPT), another €500m from Banco Sabadell at midswaps+210bp in a 3NC2 structure while Dell Bank also issued €500m in a no grow 4-year at midswaps+205bp (-30bp versus IPT). All these financial institutions are rated in the mid to low triple category.

In the REIT space, Digital Realty took €500m in a 10.5-year at midswaps+142bp, while insurer Legal & General issued £500m in a PNC11.25 RT1 offering to yield 5.625% (-62.5bp versus IPT) on a £3.75bn book. And Warner Music Group priced €325m of an 8NC3 deal at 2.75% in the high yield market.

Steady after the recovery

It wasn’t all plain sailing in the session. Shareholder dissent at Lufthansa put the whole bailout under threat and the potential risks for insolvency proceedings heightened. In China, the Covid-19 outbreak seemed to be worsening in Beijing, with travel severely curtailed and schools closed. We might just see the next phase of market volatility.

In a good sign that global trade might be picking up, AP Moeller-Maersk said that demand was developing more favourably than expected in Q2. The rally in equities ran out of steam a little, but after the recovery on Tuesday, few would begrudge that. At least they managed to stay in the black for the most part.

The FTSE closed flat, the Dax was 0.5% higher and US markets were flattish at the European close. Rates were also doing very little in the session, close to unchanged apart from in the UK where yields fell probably in anticipation of the announcement of a new QE programme by the BoE. The 10-year Gilt yield declined to 0.19% (-3bp).

Credit index backed up a touch too. In synthetics, iTraxx X-Over rose to 371.8bp while Main was unchanged at 64.5bp. In cash, after that 10bp tightening on Tuesday, the IG index gave 1.5bp back to close at B+146bp and the AT1 index did the same, 10bp wider at B+660bp. The high yield market though was unchanged at B+514bp.

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.