22nd November 2020

🗞️ Corporate bond market in a sweet spot

MARKET CLOSE:
iTraxx Main

51.7bp, +0.7bp

iTraxx X-Over

280.8bp, -1.4bp

🇩🇪 10 Yr Bund

-0.59%, -2bp

iBoxx Corp IG

B+106.4bp, unchanged

iBoxx Corp HY

B+395bp, -1.5bp

🇺🇸 10 Yr US T-Bond

0.83%, -2bp

🇬🇧 FTSE 100

6,351, +17

🇩🇪 DAX

13,137, +51

🇺🇸 S&P 500

3,557, -24

IG spreads heading for record tights in 2021…

We’re into Thanksgiving week, but it’s not quite a case of ‘that’s all folks’. There ought to be a flurry of activity into the long break, but next week still offers investors a chance to get involved or not. That depends on the Black Friday/Cyber Monday sales efforts, albeit clouded this year by the impact of the coronavirus pandemic-induced lockdowns on retail shopping patterns.

As it happens, there are plenty of reasons to be bullish risk assets into year-end and to anticipate a continuation of any rally through Q1/2021 at least.

The Covid-19 vaccine pipeline will soon be bolstered by the AstraZeneca drug.  Should its efficacy and ease of storage and distribution be in line with – or better than those already in the public domain – then there will be plenty of reasons to expect a return to some kind of normality through Q2 next year.

In anticipation, their risk curves will adjust. Equities should go significantly higher and while we have called for 3,700/30,000 for the S&P/Dow indices by year-end, any delay in those targets will only be until Q1.

A back-up in rates (in the US) might act as a limiter on a more substantial rally – classically anyway. However, economic throw and presence have broken down many times since the post-2008 crisis era. It probably will again, unless rates shoot higher from their current 0.85% area (10-year US Treasury) to say 2.00%, for example.

Credit markets will remain unruffled. We are close to or have hit a macro floor. Recovery in activity in any form from here will be a positive sign. Eurozone rates don’t look to be going anywhere and we are going to see some sort of further action from the ECB at the next meeting. That means low policy rates, likely low market yields in Europe, forever (in a sense).

Add in the hunt for yield and stabilising corporate credit fundamentals where the default rate thus far looks to have been contained, then credit has found its sweet spot. 

Spreads in IG anyway, are going to record tights we would think sometime in 2021. If economic recovery looks sustainable – at whatever level – and it will be slow and laboured after perhaps an initial surge; Then the compression trade will boost higher beta corporate bond risk. That includes the AT1 market.


Plenty of fish still in the pond

Friday proved to be fruitful in credit primary. There was a juicy 9% coupon from the Co-op Bank for those investors fortunate enough – or willing to get involved in the £200m 5NC4 issue.

In IG non-financials, Sweden’s Telia issued €500m in a 10-year at midswaps+48bp which was 27bp inside the IPT, off a book in excess of €2bn. And French group Teleperformance also issued €500m in a 7-year at midswaps+75bp (-35bp versus IPT, books €2.2bn).

Here is last week’s IG issuance in full:

Last week’s Primary € deals

Other deals of note took in American Honda in sterling, for £500m in a 6-year at G+82bp (-18bp versus IPT), while Louis Dreyfus issued €600m in a 5-year offering a yield of 2.375% (-50bp versus IPT, books around €3.3bn). Carnival Corp also priced up its €500m 5.25NC3.25% at a yield of 7.625%.

Other deals came from REIT CTP BV for €400m at midswaps+120bp (-30bp versus IPT) in a 3-year green offering, and we had Tritax issue £250m in a 13-year at G+120bp (-20bp versus IPT, books £2bn). These deals capped off an overall relatively busy week in corporate primary.

In IG non-financials, €7.5bn was issued from 10 borrowers (13 tranches) and the total for the month is up at just €10bn following a muted start at the beginning of November. For the year to date, the record grows, now at €351bn.

Some €4bn was printed during the week in the high yield market and the year to date total is now up at a record €79.8bn, with a healthy pipeline still in the works.


No roll-over…

There was some concern on Friday – lower US equities followed – on news that the outgoing US administration could be seen to be doing its best to tie the new ones’ hands regards firepower that the Fed could use in extremis. Treasury Secretary Mnuchin announced that they decided to close several ‘temporary’ emergency liquidity lending facilities once they expire at year-end.

Joe Biden et al would need to get congressional approval for reinstating any additional liquidity facilities. Of course, they will meet stern resistance. It seems and smells like a political move – and that means it probably is, effectively preventing the Biden administration from bailing out state and local governments. It gives the Republicans massive leverage given that they will likely control the House. Let’s hope there is no further near-term crisis.

US equities closed by up to 0.75% lower, the FTSE was up 0.3% and the Dax gained 0.4%. Rates were slightly better with the 10-year yield on the Bund edging to -0.59% (-2bp). Bitcoin has managed to hold firm too, trading out in the $17,000 – $19,000 per coin range, and probably needs to hold these levels for a while to maintain confidence in the recent mega-rally. Before that is, we think, it can take another big leg higher.

In credit, IG was unchanged leaving the iBoxx index at B+106.4bp while the HY index closed at B+394bp (-1.5bp). The yield on the IG index at just 0.39% is back at record low levels and we think going lower as spreads go tighter and the better bid for the underlying remains intact.

Corporates haven’t really needed to fret at any stage this year on the funding stage. Markets have been receptive throughout the year to deals – and that is still the case.

As for this week, activity will be crammed into the first three days as we come to a close after Wednesday due to the US Thanksgiving break. On the economic data front, we have manufacturing and services PMIs from Europe and the USA dominating on Monday, German GDP on Tuesday and US durable goods for October along with US GDP for Q3 and sentiment surveys on Wednesday.

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.