18th November 2020

Corporate bonds? Naaah, ₿itcoin

iTraxx Main

49.9bp, -0.1bp

iTraxx X-Over

280.0bp, -5.9bp

🇩🇪 10 Yr Bund

-0.56%, unchanged

iBoxx Corp IG

B+106.5bp, -0.5bp

iBoxx Corp HY

B+396bp, -3bp

🇺🇸 10 Yr US T-Bond

0.87%, unchanged

🇬🇧 FTSE 100

6,384, +19

🇩🇪 DAX

13,199, +65

🇺🇸 S&P 500

3,613, +4

Bitcoin’s rise has been relentless…

We really should be talking about Bitcoin, because that’s where the action is. We are at, or around, record highs in the US equity markets as the S&P and Dow look to imminently test 3,700 and 30,000, respectively. Such excitement. But The leading cryptocurrency’s exponential gains since early September have seen its price close to hitting its own intraday high, last recorded back in late 2017. That’s much more impressive.

Similarly, its market capitalisation is now at a near-record $340bn. Loose central bank has helped but PayPal’s recent endorsement and involvement has given it – and we think crypto generally – much greater credibility.

Crypto is a gamble though, isn’t it? Whereas traditional risk markets are not…

In those traditional risk markets, we’re in need of a catalyst – a headline – to push them significantly higher. That will possibly come from the next vaccine announcement because the second wave lockdowns are unlikely going to furnish investors with anything positive in terms of macro news. A Brexit trade-deal announcement will help, but we think only at the margin.

It’s been a good couple of weeks, though, and we have managed to claw back a lot of performance allowing portfolios, come year-end, to record a positive result – if it all holds. It should.

The rollercoaster ride in credit has eventually produced the desired results. There isn’t likely going to be much in the way of asset reallocation from the asset class. That returns have recovered into the black will keep funds in the market and they will be added to, suggesting a solid start in Q1 2021.

IG spreads (iBoxx index) are now just 3bp wider for the year so far (over 150bp tighter than the pandemic wides) and total returns are inching higher each session, now delivering 2.4% for the year to date. For reference, the Dax is still down 0.4% this year and the FTSE is 15% lower. Admittedly, the FTSE has had a great couple of weeks, adding 14.5% this month already!

The high yield market is back in the black in total return terms, now up +0.2% after spending most of this year deep in the red. There’s only 51bp of tightening to go in order to get spreads back to flat for the year – which is unlikely. It’s been an excellent recovery though from the pandemic wides.

Defaults have been contained and we think confidence in this market should remain fairly robust. We don’t think that 2021 will herald yet another record year of issuance after two consecutive records (2019, 2020) but we do seem to be looking at a flourishing high yield primary market.

Primary deals in all sectors

There was a flurry of activity in the corporate primary market. There was obviously huge interest in the China triple-tranche euro deal and most of the focus would have been here. The sovereign issued 5-year, 10-year and 15-year tranches for €750m, €2bn and €1.25bn, respectively. They printed at midswaps+30bp, 55bp and 70bp, respectively, with demand pitched up at round €18bn.

In the IG corporate world we had Vinci issue €500m in an 8-year green transaction priced at midswaps+27bp, which was 28bp inside the initial guidance with interest in the deal at over €2.7bn. Ubisoft Entertainment issued €600m issued a 7-year at midswaps+125bp (-15bp versus IPT, books €2.7bn+).

And we had ZF Friedrichshafen lift €500m in a 6.5-year maturity deal to yield 2.875% which was a massive 75bp inside the initial talk and clearly highlighted the leads’ mis-read of the market interest. Books were in excess of €4bn. It was the borrower’s third deal this year, having previously issued €1.5bn in a dual-tranche transaction in September.

Other deals of note included Hoist Finance which issued €200m in a 4-year to yield 3.375% and BPER Banca took Tier 2 funding for €400m at 3.625%.

Waiting on the next big move

Just a week after announcing that its virus vaccine was 90% effective, the BioNTech/Pfizer final results reported that the vaccine showed efficacy rate at 95%, matching the results from the Moderna vaccine. It’s now pretty much left to AstraZeneca to come in with their own results, as well as how their drug will be administered, to bolster defences and give hope against containing the rampaging transmission of Covid-19.

As markets wait for the next big move, this session was a slightly positive one for risk. The FTSE and Dax indices rose by up to 0.5%, while at the European close, US markets were a small up or down. Rates were unchanged.

In credit, the iTraxx indices were better offered for choice (lower) and thus Main was 0.1bp lower at 49.9bp and X-Over was 5.9bp lower at 280bp.

The cash market similarly felt a bit of a squeeze again, with the IG iBoxx index now at B+106.5bp (-0.5bp) and the high yield market index was 3bp tighter at B+396bp. All in a fairly unremarkable session.

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.