21st June 2020

✨ Corporate bonds: Stellar recovery, more to go…

iTraxx Main

65.6bp, -1.1bp

iTraxx X-Over

381.4bp, -1.7bp

🇩🇪 10 Yr Bund

-0.42%, +3bp

iBoxx Corp IG

B+149.3bp, unchanged

iBoxx Corp HY

B+522bp, +3bp

🇺🇸 10 Yr US T-Bond

0.70%, unchanged

🇬🇧 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″]

Who would have thought it?…

It’s been an excellent recovery for corporate bond investors/portfolio managers over the last 3 months. In the depths of the Covid-19 pandemic panic, the benchmark returns in IG, for example, bottomed at -8% in the period to end March. Few would have thought that getting back to flat or into positive territory was remotely possible for 2020. The index is now off by just 0.1% but most IG portfolios will be in the black.

Not panicking, adding new deals, recovery in equity markets, comfort from the plethora of central bank stimulus packages, relatively low levels of single name even risk (so far), as well as corporate default headlines suggesting the market might come through without overly being crushed.  All of these factors have all helped to maintain high levels of confidence in the product.

Putting their money where their convictions lie, cash is flowing into corporate bond funds. The new issue markets – in IG anyway – are rampant with €243bn issued already as we approach the 6-month stage of the year. For perspective, the annual average since 2014 has been €265bn while the record level of supply came last year, at €318bn.

The more remarkable sector, though, has been the high yield one. It had collapse written all over it in that mid-march period. Panic in the markets, closure of the funding window for an unprecedented 6-weeks (zero primary volume) and an impending global market crisis. No business as economies shut down and, of course, the fat lady was singing – bringing to an abrupt end the decade-long halcyon period for the European high yield market.

But it never happened. It actually hasn’t even got close. It might at some stage but with economies re-opening and bond covenants being renegotiated in some cases, the high yield market might scrape through relatively unscathed. The opening up of the capital markets and funding disintermediation has played its part. Refinancing (wall of funding) risk remains low.

iBoxx index spreads gapped from around B+325bp pre-crisis to B+900bp at the peak. However, that’s a full 1200bp tighter than where the index was at the worst point in 2008 (admittedly it was a €50bn market then versus a €350bn now). But we’re now back at around B+500bp.

Portfolio performance was crushed, too. Gains of 3% pre-crisis left HY investors sitting on total return losses of 20% in the period to the last week of March. That’s a loss year to date of 6% now and the sector has every chance of getting back to flat after the summer if the second waves are contained.

With the central banks also now buying IG corporate bonds (in the US) and fallen angels (likely by the ECB soon), a crowding-out effect ought to help bolster the market as well.

Overall, credit seems to have recovered its mojo and can continue to record rising returns from here. We will need macro and equity market compliance but we are far from a summer of discontent.

Poised and raring to go

We managed to get Abertis away in Friday’s session, as the borrower printed €900m in a short 9-year at midswaps+255bp. It wasn’t such a fancied deal, the books up at just €1.7bn and they reduced the final price by 25bp versus the initial pricing gambit. Still, it capped off a super week for the IG non-financial market, with €18bn of debt issued taking the monthly total to €34.5bn.

There’s just over a week to go before we close out June and we should be looking for that €50bn barrier to go, which would make this the third successive month of €50bn+ of issuance. With €244bn issued this year so far, we’re going to be looking at a record-busting €370bn+ for the full-year (and we’re being conservative), as the latest crisis to hit the markets fuels corporate bond activity to record levels.

The traditional holiday months of July and August are likely going to see an above-average level of deal flow we think, such has been the disruption in the markets, but where corporates are bolstering balance sheet liquidity into an uncertain second half/2021. The market can handle it. There’s plenty of cash to put to work and the recent recovery will only provoke the ‘safe-haven’ IG corporate bond narrative.

Credit closed unchanged in Friday’s session with the iBoxx IG index at B+149.3bp, B+522bp for the HY index and the AT1 index at B+689bp (+7bp).

Equities eventually regained their poise as well although the S&P failed to stay in the black in last week’s final session. The FTSE managed to put on 1.1% though, the Dax 0.4% while the S&P eventually closed 0.6% lower. There wasn’t too much happening in rates.

As for this week, there’s a mixed bag on the data front and some of it might be distracting. As ever, we will be watching the coronavirus’ spread particularly across the US. On the economic front, sentiment surveys kick us off, then we have manufacturing/service flash PMIs for the Eurozone/UK/US/China on Tuesday along with UK GDP for Q1 and Europe CPI.

The German Ifo business/current conditions surveys on Wednesday add to the big Japan Tankan survey. We also have the IMF’s global economic update due, with the organisation expected to slash global growth forecasts for this year from the current 3% (which itself was lowered in April).

That’s before US GDP, durable goods and initial jobless claims all hit the screens on Thursday. Friday rounds off with US PCE and the Michigan survey, although the US is closed early for Independence Day.

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.