29th January 2020

🗞️ Boing, boing

iTraxx Main

45.0bp, -1.3bp

iTraxx X-Over

222.0bp, -7.7bp

🇩🇪 10 Yr Bund

-0.38%, unchanged

iBoxx Corp IG

B+104bp, unchanged

iBoxx Corp HY

B+360bp, -3bp

🇺🇸 10 Yr US T-Bond

1.64%, +4bp

🇬🇧 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″]

What crisis…?

We should probably be thinking in terms of setting our sights a little lower for 2020. The coronavirus is here to stay and is likely going to have a material impact on markets. As more international barriers go up in attempts to stymie the spread of the virus, then trade, investment and confidence and other drivers of growth are going to be impacted.

There will, therefore, be a significant hit on Asian regional growth and by extension on global macro.

We would not be surprised if the Q1 economic data over the coming weeks spurs some necessary central bank action, even if most agree that further easing from here is not going to offer much in terms of upside in growth dynamics.

The FOMC will stay pat on Wednesday and we think that the very recent domestic data will be enough to keep the BoE from moving as well in Thursday’s MPC meeting. Things will be different by the end of Q1.

At the moment, we think that the markets are behaving with a very measured tone. Equity markets initially took several big hits, but already look to be moving with smaller moves (up or down).

Rates have reacted as well but likely have found a new level for the foreseeable future. Credit primary has slowed, but we’re printing away nevertheless; The pipeline is rammed in high yield anyway and secondary credit is seeing only moderate levels of weakness.

Judging by the signs in risk prices, we’re not sure they are even reacting to the headlines. Could it be that as things stand, the ‘coronavirus event’ is another swatted aside by the market? There’s a long list of market derailing events before it which have had the same treatment.

This time, maybe the expectation of easier policy to help smooth over the macro weakness we’re going to experience will be enough to keep market propped up.

Deals still flowing

In the IG non-financial sector, Sweden-based hygiene and health group Essity issued €300m in a 10-year priced at midswaps+58bp, which was 27bp inside the opening guidance and made possible after the interest topped more than 5x.

US-based Prologis went for a dual-tranche deal. They printed €550m in an 8-year at midswaps+50bp and €650m in a 15-year maturity at a midswaps+85bp, reducing the final pricing by 20-25bp across the tranches. There was also reverse enquiry €150m 2-year floater thrown into the mix.

In the high yield market, German pharmaceutical group Cheplapharm priced its debut and increased €500m deal of a 7Nc3 deal at 3.5%, while WEPA was in the market for a tap of €50m of its 2.875% 2027s.

This is easily a record pace of issuance. We can afford a few difficult months as we head for an annual record (€76bn). Because at €11bn for the month so far, it’s the best January for issuance in the high yield market by some margin (previous was €6bn in 2015).

Other notable issues came from Greece which issued €2.5bn in a 15-year at midswaps+165bp (-10bp versus IPT) with books up at around €19bn and  France which issued €5bn in a May 2052 maturity act OATs+4bp (around €40bn of interest).

We will do it our way

Equities were in choppy form. They started higher in Europe, offering some much-needed relief from the sharp drop of the previous session, before declining and then rising again. Sharply. It was all down to US market opening in sprightly fashion and dragging everything better.

It helped that US consumer confidence came in better than expectations, but that was set against December’s core durable goods orders declining by 0.1% against expectations of a rise of 0.2% (-0.4% previously).

The FTSE eventually rose by 1% and the Dax by 0.9% with gains of 1% or more across most European markets. As at the European close, the S&P was up by 1.1%, the Dow by 0.8% and the Nasdaq by 1.3%.

Rate markets were mixed. We had a sell-off in Gilts with the yield on the 10-year rising to 0.55% (+4bp) and the US Treasury yield rose to 1.64% (+4bp). The 10-year Bund was unchanged to yield -0.38% however.

Protection costs declined in line with the rise in equities. iTraxx Main closed 1.3b lower at 45bp and X-Over was 7.7bp lower at 222bp.

Cash in cash didn’t move much, although there wasn’t a huge amount of flow in any case. Better equities usually elicit a reaction from the Street as the offered side suddenly disappears. Maybe we will see a more measurable move on Wednesday.

The IG iBoxx index closed unchanged at B+104bp as the AT1 market was similarly unmoved (index just +2bp to B+374bp). In high yield, there was a moderate tightening of 3bp in the index, leaving it at B+360bp at the close.

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.