19th November 2020

🗞️ Corporate bond markets’ clear direction

iTraxx Main

51.0bp, +1.1bp

iTraxx X-Over

282.2bp, +2.2bp

🇩🇪 10 Yr Bund

-0.57%, -2bp

iBoxx Corp IG

B+106.6bp, unchanged

iBoxx Corp HY

B+396bp, unchanged

🇺🇸 10 Yr US T-Bond

0.85%, -3bp

🇬🇧 FTSE 100

6,336, -49

🇩🇪 DAX

12,086, -116

🇺🇸 S&P 500

3,562, -5

Brakes applied, except in primary…

It seems like markets have hit the proverbial brick wall. After a massive relief rally on the back of coronavirus vaccine developments, any fresh news on them isn’t eliciting the same euphoric response (if any at all). Buy the rumour, sell the fact of course. Now it’s the hard macro facts that are dominating. The second wave virus spread is bashing down on activity. The Brexit trade talks are reaching their denouement. And the EU’s 2021 – 2027 budget has come up against resistance from Hungary and Poland, leaving the region potentially facing a budget crisis. The usual fudge beckons.

Oblivious to the risk-off tone in the session was the primary corporate bond market. There’s still much work to be done here. Deals are always in preparation and if the credit investors’ mood is good, the trigger is pulled. Thales, Metso Outotec, Nestlé and Engie amongst others were prevalent in the session. Demand was excellent and IPTs were way off the mark as final deal pricings were rammed tighter.

These deals took the year to date IG non-financial volume over the line past €350bn – already €32bn more than last year’s annual record. With Carnival Corp amongst others lining up and/or printing in the high yield market, we are soon to pass the €80bn mark in this market for the first time in its history.

With the equity market under a little pressure, credit spreads didn’t do too much, edging wider for choice amid low flow and volume. We also had a modest back up in crypto, with the last couple session now checking the previous exponential rise in prices.

Non-financial corporates hold court

In primary, there was a high level of demand for just about everything on the screens. Nestlé made a relatively rare visit, but the solid name took €1.5bn split equally between 5-year, 12.5-year and 20-year tranches at midswaps+15bp, 28bp and 35bp, respectively which was 27bp – 30bp tighter across the tranches versus IPTs. Books for the transaction were in excess of €7bn.

Thales issued a long 5-year maturity €500m transaction costing midswaps+47bp (-28bp versus IPT), with book at €1.3bn. Finland’s Metso Outotec lifted just €300m in along 7.5-year at midswaps+135bp (-35bp versus IPT, books €1.25bn). And then we had Engie’s green PNC8 €500m hybrid deal, which went out with indications of 2.125% – 2.25% and finally priced to yield 1.55%, with interest at around €5bn for the deals.

In high yield sterling, National Express saw interest approaching £4bn for its £500m PNC5.25 hybrid which priced to yield 4.25% versus an IPT of 5%.  Infopro Digital’s dual-tranche final pricing details were released, the HY-rated corporate issuing €500m in a 5NC2 at a yield of 5.50% and €200m in a 5NC1 at Euribor+550bp, with both 70bp inside the initial guidance.

There was obviously good demand for the Carnival Corp deals, with the borrower upsizing its euro tranche to €500m for a 5.25NC3.25 offering at mid-high 8%, as well as $1bn deals (to be priced on Friday – also mid-high 8%s). Yield talks.

Not chasing it

There is more coming out of China regarding issuer defaults, corporate governance and the like. Funding costs for corporates are increasing. Is this harbinger of things to come both there and other jurisdictions? It also begs the question as to how much of the Chinese ‘recovery’ can we really believe? To that end, can we believe that they even have Covid-19 under control?

While we look for spanners, Trump lurks and can still be a major disruptive influence during his final week in the White House. Into all that, Wall Street generally has had the upper hand versus Main Street with the latter bearing the brunt of the mess caused by the coronavirus.

Back to the here and now, with Lagarde promising more from the ECB – not necessarily additional easing in policy rates – but greater bond buying and/or for even longer, there was a slightly better bid for rates. The yield on the 10-year Bund declined to -0.57% (-2bp), where only just last week it was heading for -0.40% following the duration sell-off into the equity rally.

Overall, the pullback left US markets in a +/- 0.5% range as we closed in Europe, where the FTSE and Dax indices lost around 0.8%. There was also a moderate pullback in credit index, with iTraxx Main 1.1bp higher at 51bp and X-Over 2.2bp higher 282.2bp.

As for secondary cash, there was nothing going. Spreads in IG (iBoxx B+106.6bp) closed unchanged as they did in the AT1 market, the index at B+523bp. It was the same in the sterling market (G+135bp) and returns were higher across the board as rates were slightly better bid.

Finally, in high yield, as we close in on €80bn of issuance for the year to date, the index closed at B+396bp. Admittedly, that’s -500bp versus the March wides.

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.