20th October 2020

🗞️ As SURE as a bond issue can be

iTraxx Main

54.8bp, +0.8bp

iTraxx X-Over

330.8bp, +2.7bp

🇩🇪 10 Yr Bund

-0.60%, +3bp

iBoxx Corp IG

B+122.5bp, -0.5bp

iBoxx Corp HY

B+464.5bp, -1bp

🇺🇸 10 Yr US T-Bond

0.78%, +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″]

Cheap funding, it’s race to the bottom…

It is looking increasingly likely that the European economy is heading for a double-dip recession, putting an end to the nascent recovery observed since we emerged from the initial lockdown. The ECB’s Lagarde is voicing her concerns just as the BoE is too – as it starts the process of readying the UK financial system for negative rates. The US stimulus is coming – but not before the election, which itself has descended into chaos and farce.

We would think that the ECB will extend and/or add to the current range of QE programmes it has in place. And no doubt the UK will be cutting rates as well as adding more QE to provide assistance to an economy under pressure from the epidemic, and will especially be so if a no-deal Brexit becomes a reality.

There’s little choice for them not to do so. Easier policy will need to get us through the arduous winter months because those second-wave, targeted lockdowns are going to heap much economic misery. A vaccine is close, judging by the latest news, but likely will not be in full-scale production and being administered until towards the end of Q1.

That means we need that additional policy support for macro over the next five months. We’re not getting complacent about it, but it puts a floor under risk markets. Unless additional events warrant otherwise, equities are underpinned at around these levels and have upside potential waiting to be unleashed.

European rates look like they are going to trade at these current levels with yields skewed towards going lower from here. We’re not even sure the 10-year Treasury yield can see 1.5% or more next year even with a $2trn+ fiscal package.

Corporate credit spread movements will be locked in between all that. Unless equities break materially higher, we don’t think spreads now will have much upside. No one is chasing the market. So it’s only the Street left to mark inventory depending on the prevailing mood and trend elsewhere in risk prices.

EU social bond in the limelight

In the markets, fixed income was all about the EU’s social bond issuance to fund spending beneficial to society. The European Union also has €750bn of pandemic issuance to get done and judging by the response to the 5/10-year opening tranches of this SURE debt, they’re going to have little difficulty in getting their cash.

The issuance won’t necessarily replace Bunds as the ‘go to’ benchmark anytime soon, but they are a welcome alternative to them for investors, given the yields on offer. The ECB’s QE programme can also buy the bonds, up to 50% of each issue.

Anyway, the so-called ‘Sure Social’ bond issues amounted to €10bn in the 10-year and €7bn for the 20-year maturity. They were priced at midswaps+3bp and midswaps+14bp (approx yields of -0.25% and +0.12%), respectively. That compares very favourably with a 10-year Bund yield of around -0.60% and a yield of -0.40% for the 20-year.

The deals were well-flagged so investors were well prepared for them – and they were ‘cheap’! Demand for the deals was over €145bn and €88bn, respectively! The other deals of note in the session came from UnipolSai which issued €500m in a no-grow RT1 PNC10 offering, priced to yield 6.375%. And Austrian REIT CA Immobilien issued €350m in a green 5-year at midswaps+165bp.

Elsewhere, risk markets were in better shape. Explanations roll off the tongue to describe why markets are up (stimulus and vaccine hopes) just as they do when markets fall (stimulus and vaccine concerns). It was deadline day for the stimulus package to be agreed (as imposed by Pelosi) and as at the time of writing, there was nothing going.

On Tuesday, it was a positive session, investors choosing to see the glass as half full. As at the time of writing (Netflix reports after the close), Philip Morris, Paccar, Travellers and P&G for example all beat for the quarter just passed.

The FTSE ended by fading its earlier gains and closed flat, the US indices were higher by up to 1% as at the time of writing, while the Dax closed lower by 0.9%. In rates, we were better offered leaving the Bund to yield 0.60% (+3bp), the Treasury 0.78% (+2bp) and the Gilt 0.19% (+2bp) – all in the 10-year benchmarks.

Of course, there wasn’t much happening in the corporate bond market, with the focus on those record-breaking EU social bonds. Everybody wanted a piece of that action. But an improved tone in the markets helped the Street tighten up the market, for choice.

So that left the Markit iBoxx cash index at B+122.5bp (-0.5bp) – and the tight end of the 3-month range it has moved in. The high yield index was similarly a touch at B+464.5bp (-1bp). All noise really. Weakness in the Dax was the driver for protection costs going in the other direction, with the iTraxx Main index up at 54.8bp (+0.8bp) and X-Over at 330.8bp (+2.7bp).

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.