25th October 2020

🗞️ Belt-in for a couple of rocky weeks

iTraxx Main

55.0bp, -1bp

iTraxx X-Over

327.9bp, -5bp

🇩🇪 10 Yr Bund

-0.58%, unchanged

iBoxx Corp IG

B+120.8bp, -0.5bp

iBoxx Corp HY

B+458bp, -2bp

🇺🇸 10 Yr US T-Bond

0.84%, +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″]

Heading into stormy waters…

The time has come for the US election which is now firmly in view. Some 50 million votes are said to have been cast already. Does that level of record turnout help Biden, or is latent Trump support turning up? It’s far from being a done deal regarding an easy Biden win.

The stimulus talks go on, but it’s fair to think in terms of ‘no agreement’ before the election. While we’re at it, there’s also no agreement on the Brexit-trade talks. No one is going to chase anything here (Bitcoin might be an exception), and we would think that the markets are going to tread water for the next couple of weeks.

It’s not all been about looking at the potential downside. The Chinese economy is in the throes of a recovery, but it will need global demand to recover to maintain sustainable upside momentum. The US employment data (as measured by the weekly jobs report) suggests that the US is hauling itself off the floor as well. The coronavirus vaccine mumble is more good than bad, but the timing of successful deployment isn’t going to come to any near-term rescue.

In Europe, we have a mixed macro picture emerging, principally because lockdowns are affecting economies as they are introduced. UK retail sales bounced back sharply in September rising by 1.5% MoM and 4.7% YoY, smashing expectations in a record quarter for growth. French and German services PMIs both missed in October and reported continued contraction in activity, although German manufacturing activity rose sharply. That was the one bright spot for the Eurozone.

So the potential for a sharp recovery dynamic is clear to see. It’s just that by the time it becomes apparent and sustainable, we might well be into Q2 2021 while in the meantime the downside risks dominate. It’s a case of hanging on until then. Because Q4 is all going to be about the dreaded double dip. It can’t really be anything else – as the national/regional lockdowns escalate.

Hence, central bank policy will see another phase of easing – more QE and perhaps lower rates, and we are most definitely going to see concerted fiscal stimulus programmes across Europe and the US. The hangover (debt repayment) is for another day.

Corporate bond markets seem well placed. Risk asset volatility will be taken through the equity market. Rates in the US will see yields edge higher on anticipation of an eventual stimulus package being agreed. In Europe, the markets will likely track the Treasury market, but if macro diverges – as it well might – we can expect European rates to succumb to a better bid.

HY issuance record beckons, again

It was a quiet end to the week in primary, but there were a couple of offerings of note to close us out. Gecina added an increased €200m tap to its 1.625% May 2034 issue as well as tapping its 1.375% Jun 2027 issue, also for an increased €200m.

We also had UK debt collector Lowell Group (with an equity cheque for £00m in hand) through Garfunkelux Holdo, issue a massive €1.34bn (and £400m in sterling 5NC2 debt costing 7.75%). They took €740m of a 5NC2 structure at a yield of 6.75% and a further €600m in a floater 5.5NC1 deal costing Euribor+625bp. The Cromwell European REIT deal was postponed.

Adding in the Adevinta deals for €1bn and Getlink’s €700m before that, we rounded off a bumper week for the HY primary market. The monthly issuance total has now risen to €11bn, and the total year to date to €73.8bn. Another €2.5bn takes the volume to the third record-breaking year in four years. Volatility permitting, it could happen before mid-November.

Away from that, credit markets were fairly quiet again. But we managed to squeeze some, the iBoxx IG cash index tighter at B+120.8bp (-0.5bp) and the first time it has seen a 120bp-handle since February. In sterling, the index was almost a basis point tighter at G+149bp – also the tightest since February.

The HY market similarly just edged a little better for choice and moved the index at B+458bp (-2bp). The synthetic market saw iTraxx Main at 55bp (-1bp) and X-Over 5bp lower at 327.9bp, reflecting the better tone in the session.

That saw the FTSE up 1.3%, the Dax was 0.8% lower in the final session and a late rally pushed the S&P 0.3% higher. This week promises to be a fraught one.

Of course, the US election comes ever closer into our sights. The Hunter Biden story might still throw something into the pot. Trump will hope it can. The stimulus package is up in the air, but not impossible something can be agreed. That would help markets. We have US GDP for Q3, PCE and durable goods data in what is a busy week on the data front. There are also earnings from Apple, Amazon, Alphabet and Microsoft to look forward to.

In Europe, it’s all about the ECB. They’re up on Thursday; We suspect nothing will change, but the various QE/pandemic programmes will no doubt be freshened up. In a boost for Italy, after the close on Friday S&P revised the country’s BBB rating outlook to stable from negative, the 10-year BTP closed to yield 0.76%.

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.