9th July 2020

🗞️ Enough is enough

iTraxx Main

63.8bp, +1bp

iTraxx X-Over

375bp, +9.2bp

🇩🇪 10 Yr Bund

-0.46%, -2bp

iBoxx Corp IG

B+151bp, unchanged

iBoxx Corp HY

B+518bp, +2bp

🇺🇸 10 Yr US T-Bond

0.62%, -3bp

🇬🇧 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″]

Primary pace couldn’t just go on and on…

It’s not quite the cocksure market we thought it could have been. Credit primary was threatening a pre-earnings blackout-period deluge, but it hasn’t quite arrived. We are at a lower level of deal flow dynamic but ought to see €20bn or so of IG non-financial issuance (around €10bn at the moment) get away this month.

Why? China. Hong Kong. Increased geopolitical uncertainty. Virus spreading almost uncontrollably across the US. Some indigestion. And the earnings season.

Actually, they’re all the reasons primary ought still to be firing on all cyclinders. Because most of the above have the potential to derail risk markets. Arguably, there is a case for it still to be about getting cheap cash on the balance sheet, and relax into the summer months and Q4.

However, with just over 6 months of the year behind us, in excess of €270bn has been issued (equivalent to the long term annual average) and it is questionable as to how much more is needed/possible right now. We expect half of that total to be issued in the second half.

Already the record run-rate has started to slow. Bayer’s offering on July 1 was a false dawn in so far as a market for July’s expectations overall. Seasonal factors (summer/holidays) are having an impact. As highlighted, the upcoming earnings season is too. Volatility still remains high (eg, Vix).

Few would dare argue against the demand side being in great shape. However, such has been the level of deal flow already this year that the opportunistic borrower will be more prevalent and thus we ought to slow, naturally. Few borrowers will worry, funding costs are staying low.

This week has been about higher-yielding debt. We’ve had a host of AT1 issuance (Rabobank, BBVA and Bankinter for example), some juicier subordinated insurance paper (for example from CCR re, Generali) and then several high yield corporate offerings. They have included the likes of Bite, Verisure and Autodis.

For IG non-financials, we have seen Cespa and on Wednesday Sodexo’s dual-tranche deal saw orders of €7bn for the €1bn offering, taking in a 3.5-year (midswaps+90bp) and an 8-year maturity at midswaps+130bp. It’s been a bit light, disappointingly so, with the mood music suggesting we might not see a meaningful pick-up forthwith.

Good start, weak ending

As for the week’s penultimate session, Czech Gas Networks issued €600m of a 7-year deal at midswaps+140bp with books of €3.7bn resulting in 45bp being lopped off the initial pricing guidance. The borrower was the sole IG non-financial issuer.

Amco Asset Management issued €1.25bn in a 3-year at BTPs+135bp and €750m in a 7-year at BTPs+140bp, around 30-35bp inside the guidance across the tranches on combined books in excess of €5bn.

High yield issuance saw Verisure price an increased €800m of a 6NC2 structure to yield 4% and Diebold Nixdorf sold €350m in a 5NC2 offering yielding 9.125% (as well as a $700m tranche). It has been a bright opening week or so for the primary high yield market with €5.1bn issued already, coming off the back of €13bn printed in June. And it’s over €45bn year to date (compared with 2020’s full-year record level of €76bn).

Otherwise, it was about sifting through the fine print of the UK summer budget statement from Wednesday, but there was a keen eye on the US jobless claims. The latter came in at a lower than expected 1.3m with continuing claims falling to 18.1m from 18.8m the previous week.

Markets initially took their cue from rising Asian markets, on a roll all week, and European equities opened higher, credit tighter, rates unchanged.

However, just before the European close, it all turned markedly sour. The US Supreme Court ruled that Trump’s tax returns be handed over to prosecutors in New York although the court blocked subpoenas issued by Congress. They will have to wait! There’s more to go in this saga as Trump will certainly raise objections.

The Dax, riding high for much of the session (+1.5%) faltered and closed 0.1% in the red, the FTSE lost 1.7% (stronger sterling didn’t help) and at the European close, the various US equity markets were 1.2% or more lower. Later, we saw bit of a rally and they were much more mixed (Nasdaq in the black, for example).

There was a good bid, therefore, in rates. The 10-year US Treasury price moved higher, and was yielding 0.62% (-3bp) as at the time of writing, the Bund closed to yield -0.46% (-2bp) and the Gilt 0.16% (-2bp).

In credit, synthetic markets were better offered lower for much of the session, but also ended with protection costs rising into the close. That left iTraxx Main at 63.7bp (+1bp) and X-Over at 275bp (+9.2bp).

Cash markets move more slowly. IG cash thus closed unchanged with the iBoxx index at B+151bp. The AT1 market edged a touch wider leaving the index at B+693bp (+10bp) as did the HY corporate bond market, the index here at B+518bp (just +2bp in the 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.