14th October 2020

🏦 Banks Keep it Rolling

iTraxx Main

53.2bp, +1.3bp

iTraxx X-Over

326.5bp, +10bp

🇩🇪 10 Yr Bund

0.58%, -2bp

iBoxx Corp IG

B+121.7bp, unchanged

iBoxx Corp HY

B+458bp, +3bp

🇺🇸 10 Yr US T-Bond

0.72%, -1bp

🇬🇧 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″]

Earnings and stimulus vs pandemic…

Credit markets seem as though they are just treading water. The all-important primary market isn’t busting a gut any longer. Everything else follows. That is explained away by the blackout period as we enter the earnings season, but also the record-breaking deal volume already this year leaving less now to get done. Even if the demand for more paper is insatiable.

Secondary credit hasn’t done much for what seems like aeons, where spreads are currently squeezing tighter on the back of higher equities. Much can go wrong and few are prepared to make any big decisions ahead of the US election, nervous on the pandemic situation and not helped by the Brexit trade talks which are now likely going to head into extra time (again).

It’s been a remarkable year by any standards and, to be fair, risk markets have recovered very well from earlier potential catastrophe. They couldn’t really fail to, propped up by the various stimulus measures and recovering now on the expectation that there is more to come (in the US).

IG credit total returns have clawed themselves back into the black now up at +1.4% year to date, although index spreads are 18bp wider. The high yield market, understandably, has laboured with returns in the year so far at -2% on index spreads over 100bp wider.

However, it has had to contend with the worst of the economic malaise – although the default rate across Europe is only up at 4% (Moody’s) and may only get as high as somewhere between 5% – 6% in this current cycle. It was up at 13% in 2009.

The point is that policy action which has flooded the markets with excess liquidity (meaning lower rates, cheap business loans and ongoing cheap capital markets refinancing) has prevented a deep ‘recession-like’ event in the corporate bond market. The worst of the pain may actually never come as the zombification of debt markets is rolled over through the medium term.

Bank earnings help stem the decline

The session again fizzled away into mediocrity with equities left to tread water again, stuck in a narrow range and gaining little direction from US markets which were doing much the same. August’s data for industrial production across the Eurozone suggested that the recovery in this sector had run out of steam as month-on-month growth came in at 0.7% (below 0.8% expectations and +5% in July).

On the earnings front, BofA beat quarterly expectation by a couple of cents (EPS) although they missed on revenues – while loan loss provisions declined markedly, from $5.4bn in Q2 to $1.4bn in Q3. Goldmans, however, smashed it on the back of strong trading volumes helping the bank to generate record earnings per share for the quarter. The beleaguered Wells Fargo missed!

That better general flow of news from the banking results helped markets although investors are increasingly concerned about the virus second waves sweeping much of Europe. Unfortunately, it is going to hamper the economic recovery and we would guess that GDP expectations for Q4 will need to be pared back somewhat.

Credit primary was alone still buzzing. In the high yield/X-Over arena we had Rolls Royce finally pricing its upsized £2bn equivalent 3-tranche, triple-currency deal. They printed €750m in a 5.3NCL at 4.625%, £545m in a 7NCL to yield 5.75% and $1bn also in a 7NCL to yield 5.75% with all the deals priced well inside the initial guidance.

X-Over rated Spanish group Cellnex issued €1bn of a 10-year at midswaps+210bp, with books at €2.9bn pushing final pricing 25bp inside the initial guidance. There was also a small deal from unrated Pierer Industrie AG for €100m priced to yield 2.625% for a 7.5-year maturity.

In IG, Asahi Group issued €800m in a 4-year at midswaps+65bp and a further €800m in an 8-year at midswaps+90bp. Combined books were up at a whopping €10bn+ with final pricing 35bp – 40bp inside the opening chatter across the two tranches.

And finally, Veolia Environnement issued €850m of a PNC5.5 hybrid priced to yield 2.25% and €1.15bn in a PNC8.5 hybrid to yield 2.50%. Books here came at in excess of €5.6bn and final yields were up to 50bp less than what the issuer went out with.

So those high yield rated tranches of late have taken the issuance volume in the HY market to €70bn for the year, and we are now just €6bn shy of the record set for the whole of last year. It’s probably safe to assume that €80bn is likely given the current buoyancy in high yield issuance. The IG non-financial corporate volume year to date is up at a record €334bn.

In rates, last week’s mini sell-off looks like being reversed all on fear coming from likely second pandemic waves, local (or otherwise) shutdowns and the macro hits that will come with them. The Bund yield declined to -0.58% (-2bp) and the US Treasury was back down to yield 0.72% (-1bp) with the Gilt yield at 0.21% (-3bp).

US equities were initially back on the rise following the previous day’s modest declines and the record level on the S&P cames back into view – before moving sharply lower after the European close. The FTSE closed 0.6%% lower while the Dax was unchanged.

Credit index had iTraxx Main at 53.2bp (+1.3bp) and X-Over rose 10bp to 326.5bp.

And finally, the IG iBoxx cash index closed at B+121.7bp and unchanged again, with just the slightest weakness in HY and the index here at B+458bp (+3bp). Noise.

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.