11th June 2020

🥊 Down, but not out

iTraxx Main

71bp, +3.6bp

iTraxx X-Over

402.4bp, +24bp

🇩🇪 10 Yr Bund

-0.42%, -9bp

iBoxx Corp IG

B+151bp, +8bp

iBoxx Corp HY

B+535bp, +30bp

🇺🇸 10 Yr US T-Bond

0.68%, -7bp

🇬🇧 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″]

Fed will underpin asset bubbles…

Concern because of the Fed’s dovish outlook will eventually be overcome, as markets will be comforted by the easier monetary policy in place for what will seem like an eternity. The Fed will be mollycoddling the economy for another 30 months, as they grapple with weaker growth and a deteriorating inflation outlook.

There was a time when the reaction to the interest rate news would have been taken with a more celebratory tone. It probably still ought to be the case, because the dynamics of the liquidity sloshing around the financial system needing a home hasn’t changed.

Markets took one on the chin (post a dovish FOMC) and undid a fair bit of the good work of the previous week or so. The weakness was being justified by any or all of the bad news items that could be found. That included concerns of second-wave infections as lockdowns ease in the US, job losses everywhere, dividend cuts and ongoing weak economic data prints.

The day of reckoning for the so-called profligacy in risk asset valuations (bubbles etc) might come, one day. It’s been expected for years. For now, we continue to stay skewed towards a positive stance for risk markets. Each big down day seems to presage the beginning of the end. False dawns.

It’s all hands to the pump for now

So it was retrenchment day even as some markets were closed due to it being Corpus Christi Day. The huge drop in equities also led to a massive rally in safe-havens. No rate move (higher) in the US until at least the end of 2022 set the cat amongst the pigeons. Fear gripped. Is the economy’s recovery dynamic that bad?

Incredibly, all the rate market weakness seen through the equity market rally in June was undone in a flash. Those yields plummeted, such that the benchmark 10-year Gilt yield fell back to just 0.20% (-7bp), the same maturity Bund yield fell back to -0.42% (-9bp) and, as at the time of writing, the US Treasury was at a yield of 0.68% (-7bp) – having been up at 0.92% last last week.

So equity markets were left nursing severe losses taking in a 4% drop in the FTSE index, and the Dax lower by 4.4%. As at the time of writing, US equities markets deteriorated further and the S&P was over 150-points (4.5%) lower. It’s difficult to envisage much of a bounce back on Friday, ahead of the weekend, with investors likely keeping their powder dry.

In credit, spread weakness. And the deal flow fell off a cliff, although we did have a couple of deals from the high yield market. The first came from Cibus Nordic Real Estate which issued €135m of a 3.25NC2 floater at Euribor+450bp. Packaging group, SIG Combibloc was in for €1bn, as the Swiss borrower took €450m in a 3-year priced to yield 1.875%, and €550m in a 5-year priced to yield 2.125%. The Ba2/BBB- rated credit would have attracted a predominately IG investor, we believe, in a combined book which came in at €2.9bn. The primary IG market drew a blank.

The cash markets weakness continued. That has pretty much been the case all week following on from a huge squeeze last week into the equity market rally. The iBoxx IG index gapped 8bp to B+151bp, representing a 12bp move this week.

Of course, higher beta markets (traders) will being defensive mode and we saw 50bp of widening in the AT1 market, the index up at B+698bp. The high yield market also saw a gapping, the spread not he index 30bp wider, leaving it at B+535bp, 45bp wider this week.

As for iTraxx, Main closed 3.6bp higher at 71bp and X-Over zipped 24bp higher to 402.4bp.

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.