2nd July 2020

🗞️ Yield sells

iTraxx Main

63.6bp, -2bp

iTraxx X-Over

367.6bp, -5.3bp

🇩🇪 10 Yr Bund

-0.43%, unchanged

iBoxx Corp IG

B+153.3bp, -2bp

iBoxx Corp HY

B+522bp, -1bp

🇺🇸 10 Yr US T-Bond

0.67%, unchanged

🇬🇧 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″]

But all eyes on China…

The second half has got off to a promising start. The data is supportive and the main driver for it. Credit primary continues to furnish us with a plethora of deals and the pipeline suggests deals to come throughout a busy July. Covid19 outbreaks and subsequent localised lockdowns are going to keep corporate treasury desks busier than usual. Still, we ought to get a short break in early August, but it’s likely an early start post holidays – perhaps in the last week of August.

The risks remain. Geopolitics are front and centre at the moment, and in the middle of it all is China. They’re picking fights with India, are in one with the US on trade, and possibly the rest of the world will get involved on trade as they pull away on their reliance and dependency on the country’s manufacturing facility. And then there is the breakdown in the rule based international order as China rubs out the joint Sino-British declaration on Hong Kong’s independence some 27-years early.

There’s plenty more as the gremlins lurk, but these are the most pressing issues at the moment.

We will huff and puff, but the economic recovery will likely continue to drive the markets through the summer and Q4. The signs here are good with recent surveys suggesting manufacturing activity across most regions is back in expansion mode. Services won’t be too far behind.

Fear of the virus’ unknown will keep corporate primary doling out deals galore. And we now include the high yield market in this as evidenced by the recent relatively high level of activity and good demand for the issued debt. That comes even if there has been some investor push back on weak covenant structures and the air of scandal around the odd deal. Yield sells.

Mixed, but long weekend to regroup

It was an altogether quieter session on Thursday, but the week does come to an early close given the US Independence Day holiday starting Friday. But it was a positive one. Trump might have secured all the Gilead anti-viral supply for the best part of the quarter, but the Oxford team devising the vaccine there suggests it will give long term protection.

However, the focus was on US non-farm payrolls. The US duly added 4.8m jobs in June and the unemployment rate fell to 11.1% – both beating expectation of +3.8m and 12.3%, respectively. In May, the numbers were 2.7m and 13.3%, respectively, highlighting the bounce-back recovery dynamics. The report was sullied admittedly by the news that 1.4m Americans made claims for unemployment, while continuing claims for unemployment benefits barely moved at 19.3m.

In credit primary, the Bayer deal from Wednesday was not going to be beaten, but we had three IG non-financial borrowers add to the pot. It’s a sprightly start, with just a couple of days in and issuance up at €8bn already.

Fraport AG issued €300m in a 4-year at midswaps+210bp and €500m in a 7-year at midswaps+250bp. The final pricing was only 10bp inside the initial guidance with books at just €1.7bn. Logicor took €500m in a 6-year at midswaps+185bp (-35bp versus IPT, books €2.2bn).

The other was National Grid which issued €750m of a 12-year maturity at midswaps+90bp (-25bp versus IPT, books €1.8bn), with a sterling tranche for £350m at G+110bp (-15bp versus IPT) for an 8-year maturity, where books came in at £750m.

Elsewhere, Uniqa Insurance issued €200m in 15.25NC5.25 at midswaps+370bp (-65bp versus IPT) as well as €600m in a 10-year at midswaps+160bp (-40bp versus IPT). And property group Vonovia issued €1.5bn in a dual-tranche deal split equally between a 6-year maturity at midswaps+100bp (-45bp) and a 10-year maturity at midswaps+125bp (-40bp vs IPT).

It didn’t finish there with several high yield borrowers also in the mix. Algeco Global priced €175m of a short 3-year priced to yield 6.5%, we had Titan Global price its €250m 7NCL at 2.75% and Renk AG lifted €320m for a 5NC2 deal at 5.75%. In sterling, B&M was due to price £400m in a 5NC2 structure. And that’s €2.2bn of HY deals in just two sessions.

With Friday unlikely to offer much as the US markets are closed, we can reflect on a good recovery week for the markets. That headline non-farm payroll report nevertheless boosted markets on Thursday and might also go someway to keep markets on the front foot into next week. The earnings season looms large, though.

At the close of play, the FTSE added 1.3%, the Dax shone with gains of 2.8% while the US markets were 1% or higher at our close. Rates were largely unchanged.

Credit index saw iTraxx Main lower at 63.6bp (-2bp) and X-Over at 367.6 (-5.3bp).

Cash was better bid too leaving the IG iBoxx index at B+153.3bp (-2bp), the AT1 index at B+686bp (-20bp) and the high yield index at B+522bp (-1bp). Small moves, but the credit market looks in good shape to hold steady through the summer months.

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.