13th September 2020

🗞️ Excess market liquidity our only friend

iTraxx Main

55.6bp, +1.6bp

iTraxx X-Over

325.6bp, +12bp

🇩🇪 10 Yr Bund

-0.48%, -3bp

iBoxx Corp IG

B+125bp, unchanged

iBoxx Corp HY

B+450bp, +5bp

🇺🇸 10 Yr US T-Bond

0.67%, +1bp

🇬🇧 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″]

And it’s Japanification across the Eurozone…

The equity market wobble – largely tech related – which brought many other markets back down to earth has hopefully played out. The markets do look tired, though. Any rise from here ought to be more measured as a result, circumspect even, when put against than that ‘whale-trade’ driven lurch higher previously.

We’re likely in for a heavy week in primary but credit spreads look set to continue to tighten anyway, the link between supply and secondary spread direction long broken. And with rates anchored, total returns in credit (including HY possibly) are on track to deliver a positive result for 2020.

The outlook is bleak for the Eurozone. That revealing ECB gig last week pretty much nailed it. We think ECB will be called into action sooner rather than later in the final quarter. The recovery dynamic of the region isn’t going to help from either a broad sustainable growth recovery, or on the inflation front.

The inability or unwillingness to tackle the (strong) currency issue is going to weigh on both the recovery and inflation, that is. There is, of course, a reluctance to cut rates any further – so the only other tool left will be to expand in size and duration the bond purchase programmes.

Even their economic outlook suggests considerable headwinds ahead, even if the big number looks good for 2021 (compared with 2020). It’s off a low base. The improved expectation for GDP growth in 2020 from -8.7% previously was cut to -8.0% now. But they cut their expectations for the rebound next year from growth of 5.2% to 5.0%.

Their inflation forecasts for 2020 was unchanged at 0.3%, but they were more upbeat for 2021 at +1% (from +08% previously and +1.3% in 2022 with that forecast unchanged). Erroneously, in our view. We think the risks on all of those data points are to the downside with pressure emerging from various areas (currency, global demand etc).

That tells us that excess market liquidity will continue to prop-up risk assets. If we’re in bubble territory, it’s not going to deflate anytime soon. IG corporate credit is worth its weight in gold, blue chips in the HY space (fallen angels and the like) are too. Most double-B rated corporate entities are also expected to be relatively well-bid given their easier access to funding and lack of a serious funding wall.

Single-B and low rated corporates is where the action is expected to be. Solid businesses will always find a way through the madness. But we must already be thinking of ‘zombie’ corporates which are going to feel the pressure that comes from the lack of sustainable growth. Their low rating is a function of being over-leveraged, having lower levels of free cash flow, more difficult debt servicing metrics and hence reduced access to market funding.

That’s going to see strategies being altered into the end of Q4, ready for the off in 2021. For the rest of this year, while we await the data to emerge and defaults to rise, we don’t think too many investors will be adjusting portfolio positions.

Heads, I win

That wasn’t quite what we were expecting, but at least the big tech sell-off has had only a limited contagion impact on European equity markets. The US markets were lower for the week, but the likes of the FTSE, €Stoxx50 and Dax saw gains. Nevertheless, the broader direction of these markets is always going to be led by US equities.

There wasn’t too much happening in rates at the end of last week either, the market settling down in a limited final session leaving the US Treasury yield in the 10-year holding below 0.70% at 0.67%, while the Bund yield declined to -0.48% (-3bp).

Credit closed last week with a trio of deals from Nissan Motor, with the Japanese manufacturer issuing €500m in a 3-year at midswaps+240bp, €750m in a 5.5-year at midswaps+305bp and €750m in an 8-year at midswaps+350bp. The deals were priced 40bp – 60bp inside the initial price talk across the tranches, with combined books up at a solid and impressive €12.7bn, and clearly skewed towards the shorter-dated tranche.

The other euro-denominated borrower in the session was National Grid, with the utility company lifting €500m in a 9-year at midswaps+80bp (-20bp versus IPT). In sterling, VW piped up with £500m of its own, in a 3-year maturity through its financial services operation, at G+135bp (-20bp versus IPT).

So that flurry of deals took the IG non-financial issuance volume for the month, at the halfway stage, to €19.1bn and to €296.2bn for the year to date. That latter number makes 2020 already the second-best ever for issuance in IG corporate debt for any full-year. We are now just €22bn short of setting a new record – which should happen before this quarter is out. The pipeline is bulging and we can expect a busy couple of weeks ahead.

And with that, we are only €20bn away for setting a similar record in the high yield market (last year €76.4bn). That’s likely going to happen towards the middle/end of the fourth quarter, which itself would be a remarkable achievement given the aforementioned potentially difficult outlook for the high yield market.

Secondary markets spent the week treading water in IG (+1bp wider, B+125bp iBoxx index) and HY (B+450bp, unchanged after slight weakness on Friday) but edged a touch wider in the AT1 market (B+620bp, +17bp in the week). The sterling corporate market, flush with some supply of late was 4bp wider with the index up at G+155bp (+3.5bp last week).

iTraxx Main moved higher to 55.6bp (+1.6bp) with X-Over rising to 325.6bp (+12bp) as we closed out.

As for this week, in credit all eyes are going to be on an expected bumper week for primary deals and a tilt at the possible IG non-financial annual record being broken before we even finish with the third quarter.

On the macro front, the week is dominated by the FOMC meeting on Wednesday, although we do also have the BoJ and BoE interest rate decisions as well (no changes expected). The data generally takes a bit of a back seat but there are inflation, unemployment and wage numbers from the UK.

In the US we have industrial production and retail sales but we are very light in the Eurozone. China sees the release of retail sales, industrial production and fixed investment data.

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.