2nd September 2020

🗞️ We …”live in interesting times”

iTraxx Main

50.3bp, -2bp

iTraxx X-Over

306.4bp, -5.4bp

🇩🇪 10 Yr Bund

-0.47%, -6bp

iBoxx Corp IG

B+124bp, unchanged

iBoxx Corp HY

B+454bp, unchanged

🇺🇸 10 Yr US T-Bond

0.65%, -2bp

🇬🇧 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″]

It’s like the Japanification, of everything…

There’s much to be wary of, but right now the mood is upbeat and the traffic is one way. Everyone’s back in the saddle in some form or another and there’s money to put to work. Equities up, yields lower, credit spreads tighter. Rare days indeed, where everyone’s a winner. It should be the case, but such is the policy manipulation of everything means that it is. Of course, we are getting ahead of ourselves, but even our hitherto bullish 3,700 S&P year-end target will soon look to be conservative at this rate.

Trump might actually win. The odds shorten by the day. While the geopolitical fires burn there might still be some kind of deal on trade with China, or at least the macro-economic need should see the trade-related tensions ease. There is ‘no’ inflation anywhere, excess liquidity though is everywhere and asset price bubbles have further to inflate.

We get the sense that there is much discomfort if not panic in the air on the policy front. As they have little choice but to err on the side of caution, it means looser we go. There has never been a ‘no brainer’ trade. But the near term looks to be mapped out. Higher equities and tighter credit spreads with government bond yields in the intermediate maturities (5-10 years) rangebound. Allocate around it.

Busy’ish primary

There was plenty on the screens again in primary, but the corporate activity was a touch lighter than the previous session. Merck, American Tower and Glencore were the IG corporates, and Greece garnered huge interest (€18bn) for its June 2030 tap (of a further €2.5bn).

Just a couple of sessions in and we have seen €6bn printed in the IG non-financial market, which augers well for a €30bn – €40bn month.

Yet another non-financial corporate greeted us on Wednesday, as Merck issued €1bn of a PNC6 priced to yield 1.625%. That was 50bp inside thew initial talk and the book was up at €2.5bn. American Tower Corp followed with a dual-tranche offering. The US group issued €650m of a long 11-year at midswaps+118bp (-27bp versus IPT, €2bn orders) and €750m of a long 7-year at midswaps+88bp (-27bp versus IPT as well, books €2.2bn).

The other IG non-financial borrower was Glencore, the Ireland-based borrower lifting €850m at midswaps+145bp for a 7.5-year maturity. The final pricing was 35bp inside the initial gambit and books came in at €2.3bn.

In financials, Banco de Sabadell issued €500m of a 6NC5.5-year ESG/green climate bond, which ticked many boxes and was priced at midswaps+155bp (-35bp versus IPT). Books for this instrument were up at a huge €3.75bn.

Risk markets remain in the ascendancy

The uneven recovery was evident in the macro data and on Wednesday where it was the turn of German retail sales to disappoint, recording a month-on-month 0.9% drop in July versus expectations of a rise of 0.5%. In the US, factory orders grew by 6.4% in July (MoM) beating the 6.0% the market had expected.

Back on the flip side, the US private sector jobs recovery slowed, with the ADP reporting 428,000 jobs being added in August although there was also an upward revision to July’s additions. Non-farms are with us on Friday.

Otherwise, US equities remained in a bullish mood and the S&P was on the way to adding another 0.5% (as at the time of writing), while European markets were also racing ahead.

German equities have also been on a good run of late. In Wednesday’s session, there was a Herculean effort which at one stage intraday saw them back in the black for 2020. They slipped back a little, but the Dax index closed almost back to flat for the year (barely 10 points short at 13,240!), after adding over 2% in the session. For once, the FTSE even managed to add almost 1.5% (sterling slipped versus the dollar, which helped).

In the US, the S&P was at an intraday high of 3,570 as at the time of writing, and the Dow moved further into the black year to date as it also heads for record territory (has been lagging for obvious ‘non-tech composition’ reasons). The Nasdaq lagged for much of the session, but was recovering into the close.

There was a crunch lower in yields as rates rallied hard. the 10-year benchmark Gilt yield declined to 0.23% (-7bp) and the Bund yield fell to -0.47% (-6bp), we think on that poor German retail sales number. There was also that 10-year €6.5bn green offering by the German government, which had orders for €33bn.

In the synthetic credit space, iTraxx Main outperformed as it dropped 2bp to 50.3bp and X-Over was just 5.4bp lower at 306.4bp.

Secondary cash in IG was unchanged amid very little activity (iBoxx index at B+124bp), while the higher beta AT1 market was better bid and the index moved tighter by 9bp to B+599bp. The high yield market was unchanged. Only primary matters.

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.