8th September 2020

🗞️ Still Under Siege

iTraxx Main

53.8bp, +0.8bp

iTraxx X-Over

328.9bp, +5.1bp

🇩🇪 10 Yr Bund

-0.50%, -4bp

iBoxx Corp IG

B+124.5bp, +0.5bp

iBoxx Corp HY

B+453bp, +3bp

🇺🇸 10 Yr US T-Bond

0.68%, -4bp

🇬🇧 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″]

As ECB comes into view…

There is an air of uncertainty around the markets. Tech stocks, in particular, took another leg lower, gold dropped over 1%, oil was off by over 5%, and government bonds well-bid as we might well expect. Still, the tech sell-off hasn’t necessarily resulted in investors panicking. Concern, but little sense of panic.

Our take is that most believe the weakness in equities, largely confined to the aforementioned tech sector, will not necessarily see them reassess their view on risk assets/equity markets. They are still likely going higher.

Credit has certainly been rock-solid stable through the volatility. Spreads are actually tighter for choice, and while we’ve had only odd deals in primary, the equity sell-off never looked like shutting the primary window.

There are going to be some further headlines around the Brexit trade situation, but this week is really all about the ECB. The bank’s economic forecasts are going to make for an interesting read and recent currency strength/weak inflation are likely going to spur the bank into some sort of action in the final quarter.

With that meeting communique in the market in its various guises on Thursday, credit primary will be about cramming deals in before it, with perhaps something to see us out on Friday.

For now, we have managed just a smattering of deals – so far. On a quieter Monday, KPN and APRR added to the IG non-financial tally with both garnering interest in excess of €2bn for their transactions. On Wednesday, we had Finland’s Elisa in the market, a punchy deal from Ryanair and a couple of hybrids (what else?) from EDF, while Commerzbank opted for AT1 funding. There was a whole host of SSA offerings.

Primary doing enough, for now

Ahead of potential further bond buying and that low rate forever outlook, Italy led the way in the session with €10bn, 20.5-year offering at midswaps+7bp (-5bp versus IPT), where demand for the deal came in at €84bn. The UK issued £8bn of a short 15-year Gilt at G+13bp (coupon 0.625%) with demand for this offering up at £76bn.

In corporate credit, Commerzbank priced a PNC10 AT1 €500m issue priced to yield 6.5%, with book up at €2.9bn and that final yield 50bp inside the initial whisper.

In non-financials, Elisa issued a sub-benchmark €300m in a 7-year at midswaps+68bp, which was 27bp inside the initial chatter off a €1bn book. Ryanair went with an €850m 5-year to yield 2.875% (-37.5bp versus IPT) with books up at solid looking €4.4bn.

We then finished up with the dual-tranche hybrid offerings from EDF. These structures have been trending at the moment, fortifying corporate balance sheets while given extra yield to investors. We count 12 individual tranches in the last 3 weeks.

The French borrower took €850m in a PNC6.5 priced to yield 3% (-37.5bp versus IPT) with books for this tranche at €2bn. They followed up with €1.25bn in a PNC10 to yield 3.5% (also -37.5bp versos IPT) with books in excess of €3bn.

Recently assigned fallen angel Ford became only the second high yield borrower with a €750m 5-year transaction, priced to yield 3.25% (-25bp versus IPT). There’s a decent pipeline building with VMED/O2 due to price a multi-tranche euro/dollar offering. In sterling high yield, the deal of note came from CenterParcs, the low single-B rated borrower issued £250m in a 6NC2 which was due price to yield around 6.5%.

So after a week’s business this month, the IG non-financial issuance comes in at €12.2bn, and the year to date total grinds up to €289bn, leaving us less than €30bn to go to hit that annual record.

Feeling a little hot under the collar

German exports rebounded in July as they moved 4.7% higher and there was a similar picture in France. Preliminary readings for Eurozone GDP for the second quarter saw prints a shade inside expectations. Year on year Q2 GDP in the Eurozone fell by 14.7% (-15% expectations) and by -11.8% QoQ (-12.1% expected).

In Italy, retail sales dropped 2.2% in July month on month after rising in the previous two months (+10.2% in June, for example). That setback highlights a very mixed picture across the Eurozone and across the various industries. The uneven recovery was always to be expected, perhaps, given the growing North-South divide in the area.

In the markets, equities initially threatened to push higher again following on from Monday’s stellar session, but failed to hold on to those opening gains. Still, there was a fightback into the European close just as US markets also came off their earlier lows. The Dax eventually ended 1% lower and well-off the session lows, the FTSE lost 0.2%. The US markets were around 2.7% in the red (Nasdaq -3.9%), as at the time of writing.

Safe-haven assets vis a vis government bond markets saw the 10-year US Treasury yield at 0.68% (-4bp). In addition, Brexit trade-related fears helped the bid for Gilts such that the 10-year yield dropped to just 0.18% (-7bp), while the Bund yield in the same maturity was back down at -0.50% (-4bp).

We had a bit of noise around the synthetic market, leaving iTraxx Main a touch higher at 53.8bp (+0.8bp) and X-Over protection 5.1bp higher at 328.9bp.

IG cash credit was a tad wider as measured by the iBoxx cash index at B+124.5bp (+0.5bp), the AT1 index gave up 15bp to B+617bp while we only edged 3bp wider in HY, the index at B+453bp.

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.