7th March 2020

🗞️ Beyond Thunderdome

iTraxx Main

73.3bp, +5.5bp

iTraxx X-Over

376.9bp, +59.6bp

🇩🇪 10 Yr Bund

-0.72%, -4bp

iBoxx Corp IG

B+138bp, +10bp

iBoxx Corp HY

B+468bp, +37bp

🇺🇸 10 Yr US T-Bond

0.77%, -16bp

🇬🇧 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″]

Things can only get worse…

There is no recent historical comparison. We’re in fresh territory and it’s become a struggle for markets trying to trade this particular crisis. It could be, that despite the big falls in markets, we ain’t seen nothing yet.

Impressively, markets are trying to hang on and are fighting a great rearguard action. Unfortunately, though, we are probably yet to have the big move. That’s because the global economy is heading for – or rather is in – an effective lockdown.

This isn’t about being short of liquidity and adding more of it into the financial system to alleviate a funding crisis. That will only help at the margins. We are in the throes of a synchronised pulling up of the drawbridge, Mad Max style. It’s every man for himself.

The traditional levers of crisis management are being deployed. Lower policy rates. We’re going to see fiscal profligacy and the EU will allow an easing of the Maastricht rules allowing governments to throw money at their respective economies in excess of the agreed established limits.

We dare think that there will be more QE if the Covid-19 pandemic doesn’t come under control, maybe before Easter. There is a growing expectation that the Fed will cut again in a couple of weeks at the next FOMC – and by another 50bp! Even Trump is flapping as his much-called-for rate cuts only instil a sense of increased fear.

It could be much worse and, in fact, it ought to be. Corporate revenues and profits are going to be savaged across a whole host of industries. Few will be spared. Investment is falling off a cliff. Confidence is dropping. Consumption is declining. Inflation is falling.

Despite that, investors are hanging their hats on there being a V-shaped recovery. The warm weather is coming, after all. In the long-run, there ought to be an impact on and a reassessment of ‘globalisation’. That particular trend is going into reverse.

All hands to the pump

In the markets, we closed last week in devastating form. Nowhere was that more so than in rates. We saw record closing lows on the 10-year US Treasury yield, at 0.77% (-16bp, Friday), with the 30-year in the same record territory yielding just 1.30% (-26bp). And these were not the intraday lows!

In Europe, the Bund yield in the 10-year benchmark has hit -0.72% (record low -0.76%) and is en route to -1.0%, we think. The Gilt of the same headline benchmark maturity incredibly is now taking a long hard look at 0%, currently at a record closing low of 0.23% (-10bp).

There was some good news – but it was swept aside. Those US non-farm payrolls for February came in at +273,000 jobs added, smashing expectations (+175k) as the unemployment rate fell to 3.5% (from 3.6%). Unfortunately, it didn’t affect the direction of travel for markets.

Equities in Europe managed to close off their lows, but that was scant consolation after the FTSE off by 3.6%, the Dax lost 3.3% and the €Stoxx50 some 3.9%. In the US, those robust non-farm payrolls couldn’t offer anything to stem the cull in US equities, although they eventually they closed off their lows and up to 1.7% lower, rounding off the most volatile of weeks for equity markets.

In credit, it was panic stations. Credit protection was bid up to such an extent that we saw one of the biggest moves in X-Over since the financial crisis started, 10 years ago. The index lurched 59.6bp higher to 376.9 and Main was 5.5bp higher at 73.3bp.

The cash market reeled. A massive 10bp was added to the IG market, leaving the iBoxx index at B+138bp – the widest level since June 2019. Total returns are still positive though this year owing to the massive rally in the underlying, while spreads for this index are 35bp wider.

Higher beta credit in the financial and non-financial sectors was battered. The AT1 index was 47bp higher at B+519bp and is now 123bp wider this year giving up a massive 190bp from the tights seen in mid-February. The corporate high yield market was also crushed, the index some 37bp wider at B+468bp.

So the credit market was well-crunched. There are very large spread moves and, of course, we can explain them away as being a function of a very illiquid secondary market. However, if investors could transact at a reasonable clearing price, some/many of them probably would.

The corporate news flow isn’t going to be good over the next few months as revenue and profit declines feed into debt service dynamics. The narrative will be dominated by credit rating cuts and very likely significantly rising defaults.

So we have a market where the ability to transact has hit a brick wall. Fund lock-in periods are probably helping to stem the market’s weakness – It would be much worse otherwise. On the flip side, the better end of the credit spectrum will see a bid – in primary predominately – should the window open, a borrower wants/needs to transact and pays up for the privilege.

Over the weekend, some data out of China saw that February’s imports declined 4% year on year while exports declined by 17.2%.

As for this week, who knows?

Eurozone GDP and industrial production data are due, as well as a raft of numbers from the US and UK. The UK’s Chancellor’s first budget and the ECB’s interest rate decision are delivered on Wednesday and Thursday, respectively. That’s where the main focus will be.

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.