26th August 2020

🏃 Hurdles Ahead, But They’re Not Insurmountable

iTraxx Main

54bp, -0.4bp

iTraxx X-Over

322.4bp, -5bp

🇩🇪 10 Yr Bund

-0.41%, +2bp

iBoxx Corp IG

B+124.5bp, unchanged

iBoxx Corp HY

B+459bp, unchanged

🇺🇸 10 Yr US T-Bond

0.71%, +3bp

🇬🇧 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″]

Buttressing balance sheets…

There’s probably more to come. Corporate hybrid issuance that is, where deals have been prevalent in these last few sessions. We’ve had dual tranches from Vodafone and OMV with Solvay also lifting €500m. Yield levels are low for issuers but high enough to make them attractive for investors. The rest is as we know – investors need yield and to get it they have to move down the credit curve and/or the capital structure curve.

“Rates are staying low, forever.” We need to get used to that idea, if we are not already. The equity risk premium looks elevated on historical measures, but those measures are redundant in this world of low rates and excess system liquidity. Furthermore, the potential for further policy action suggests that equities have room to rise much further. And higher-yielding fixed income markets will remain better bid.

By extension we can, of course, make the old argument that it is better to buy a subordinated hybrid bond from a well-known large IG-rated corporate than perhaps a HY bond issue of a leveraged, potentially ‘zombie” business. However, we think both markets will benefit in the near term at least as they are dragged higher, if nothing else, by rising equity markets.

Reasons to be Bullish

The Republican Party conference is well underway and our read from it is that Trump is far from beaten in the race for that second term. The mood music has shifted a little towards the Republican Party as we might expect given the extra publicity and conference content. The rioting, looting, violent unrest and silence on the issues from the Democratic Party is only feeding into Trump’s narrative.

In addition, the headline risks around the virus pandemic suggest that the disease seems to be receding (for the moment), while we are in a more expectant phase regarding potential vaccine developments.

With most investors back in the saddle (at home or in the office) after the summer break from next week, that portfolio cash will need to be put to work. We look for higher equities to boost most risk assets. The possibility of some kind of further Fed action in September’s meeting is also going to help prop up markets, while Powell’s Jackson Hole address this week could possibly be a policy framework game changer.

Next week and beyond, we believe that European corporates will not be shy in loading up on more cheap funding – assuming the record pace set in 2020 so far wasn’t a total panic lift, and purely bringing forward funding intentions. We think it wasn’t (even if much of it was defensive) and are anticipating a record year for issuance in both the IG and HY euro-denominated markets.

Just €42bn of issuance is needed in IG non-financials between now and year-end (likely achieved by end October), with just €23bn of deal volume in HY to beat last year’s €76bn record issuance.

Away from that, the macro data is mixed but we are clearly off the worst levels seen during this pandemic. Witness the US durable goods orders for July ($230.7bn, +11.2% versus June) which surged to their highest levels since February.

The growth trajectory is upwards and while we can largely write off much of 2020, the anticipation for 2021 should see risk markets sustain upward pricing momentum. In credit, the big caveat is how lower-rated European HY corporates, for example, fare once the emergency-stimulus has been withdrawn – Emperor’s clothes and all that.

All Calm – Before the Storm

In all, Wednesday was a quieter day all round. We can expect a quieter couple of sessions to close out this week as focus shifts to the Fed’s annual Jackson Hole symposium, but the long Bank Holiday weekend in the UK will only see the credit markets open proper next Tuesday. The volumes could be heavy.

In credit, we didn’t see any senior corporate bond issuance in the non-financial market or the bank sector. State-owned entities were predominately on the screens. There was, however a hybrid issue from Bank of Ireland (PNC5, AT1) for €300m priced to yield 6% (books in excess of €1.75bn, -50bp versus IPT), while Danske Bank issued T2 debt for €500m in a 10NC5 maturity priced at midswaps+190bp (-30bp versus IPT, books €2.75bn). Government-owned Belfius Bank issued €500m of a senior non-preferred at midswaps+178bp and REIT Heimstaden Bostad took €650m in a 6.5-year at midswaps+180bp.

Finland issued €3bn of a 10-year at midswaps-6bp, while at the other end of the credit spectrum, Finnair paid 10.5% for a €200m PNC3 hybrid issue. The coupon beats the Carnival Corp 10.125% one from mid-July and the Finnair issue is now the highest yielding debt offering (at launch) since July 2017.

In the US, at our close, the S&P and Nasdaq were busy setting record highs, again! What else? The FTSE closed flattish while the Dax was 1% higher on the back of a late rally.

There was some further weakness in rates, with the yield on the benchmark 10-year government b0nds all backing up again. The Gilt yield moved to 0.30% (+3bp), the Bund yield was up at -0.41% (+2bp) and the Treasury was yielding 0.71% (+3bp).

Secondary credit spreads barely budged. There was little focus in the market ahead of an expected flurry of deals to come next week. That calm before the primary storm saw the iBoxx IG cash index at B+124.5bp and unchanged, with the HY index also unchanged at B+459bp.

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.