10th June 2020

⏸️ Fed likely on hold for 18 months!

iTraxx Main


iTraxx X-Over

378.3bp, +17.7bp

🇩🇪 10 Yr Bund

-0.33%, -2bp

iBoxx Corp IG

B+143bp, -4bp

iBoxx Corp HY

B+505bp, +11bp

🇺🇸 10 Yr US T-Bond

0.78%, -5bp

🇬🇧 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″]

Markets flooded with deals…

The pace of the IG non-financial issuance shows absolutely no sign of letting up. The market is being flooded with paper but the demand for it is undimmed, the mop-up operation working a treat. The deluge looks like we are heading for a €40bn+ June, after successive €50bn+ record-breaking months. The deal make-up is beginning to change too, with non-financial and financial corporate hybrids making a comeback. Risk tolerances are improving.

That’s because credit markets are also playing into the recovery narrative. It’s not just confined to equities. Credit spreads have generally been ripping tighter of late, returns are recovering close to back to flat and that confidence is clearly eliciting further demand for corporate risk, on funds bloated by the cash inflows.

There was another host of issuance in the market on Wednesday, taking the IG non-financial total to €226bn year to date. To put that into perspective, the average issuance per year since 2009 has been €260bn. Last year’s record €318bn will fall by the fourth quarter.

We also happen to believe that the high yield market will start to gain greater traction. Its primary machinery came to a halt in March, but since May there have been more encouraging signs that investors are going to be increasingly receptive to deals. We’ve seen a not too shabby €32.3bn issued this year which, on the face of it, actually compares favourably with the amount issued in the corresponding period in 2020’s record year.

There will be a decent backlog of deals to get done. Borrowers will be hoping for spreads to tighten a little more and for the tone in macro and risk asset pricing to improve some more. It’s probably too much to expect we get north of €70bn away for the full-year, but €60bn+ is very likely.

Primary market glory run continues

The deals saw Edenred issue €600m at midswaps+145bp for a 9-year deal on books of just €1bn, with just 20bp lopped off the initial price guidance into the final price. Enexis issued €500m in a no grow 12-year at midswaps60bp (-35bp versus IPT) with books up at almost €3bn.

Italy’s Snam went for 10-year funding for €500m at midswaps+80bp with books just at €1.5bn and final pricing 35bp inside the initial talk, while Volkswagen went for a dual hybrid offering. The German auto giant issued €3bn split equally between a PNC5 offering yielding 3.5% (-37.5bp versus IPT) and a PNC9 tranche at a yield of 3.875% (-50bp versus IPT), off combined books at €6.75bn.

Unrated (implied high yield in our view) Finnish group TietoEVRY issued €300m of a 5-year at midswaps+235bp (-15bp versus IPT, books around €500m). Illiad took €650m in a 6-year maturity offering costing them midswaps+285bp and the high yield round was wrapped up with the €711m issue from IQVIA’s 8NC3 deal.

French borrowers are way out in front on the geographic split of the issuance this year, taking up 27.1% of the deal total. German corporates approach 20% and surprisingly, US-domiciled borrowers lag their recent annual average. They are currently responsible for just 15.3% of the issuance as we approach the halfway stage of the year (compares with 30% for the whole of last year).

In financials, we had a senior deal from BPER Banca (rated sub-investment grade), with the group lifting €500m in a 5-year at midswaps+220bp (-30bp versus IPT). Nationwide Building Society issued £750m in a PNC7.5 CoCo, the AT1 deal priced to yield 5.75% (-50bp versus IPT), with interest for the offering at over €4.5bn.

There were sovereign issues from Finland (€3bn, 20-year midswaps+10bp) and Croatia (€2bn, 11-year, midswaps+165bp), with Germany tapping its 2050 issue for a further €6bn.

Markets wary ahead of Fed, rally after

Elsewhere in the markets, economic news was light ahead of the Fed decision/communique. Of note, US CPI ex food and energy recorded a drop of 0.1% in May, highlighting the recessionary effects of the coronavirus pandemic.

As for the Fed, of course they left rates unchanged (0.25%), but predicated rates would be left at these levels through 2022! The dovish tone struck by the FOMC took in a GDP contraction of 6.5% this year and unemployment at 9.3% at year-end (+5% and 6.5% for GDP and unemployment rates, in 2021).

Before that, European markets closed in the red with the Dax losing 0.7% and other European bourses up to 0.8%. The FTSE was just 0.1% lower. After the close and the Fed call, US markets were rallying and conformably in the black. That augers well for our open on Thursday.

Rates were much better bid. That left the 10-year Gilt yield to decline to 0.27% (-7bp), the equivalent maturity Bund yield fell to -0.33% (-2bp) and the US Treasury, at the European close, yielding 0.78% (-5bp).

And in the credit markets, more weakness in the protection space with Main 2bp higher at 67.4bp and X-Over at 378.3bp, or 17.7bp higher.

In cash, we went wider for a second successive session, albeit in light trading, and across the board. The Markit iBoxx IG cash index back-up by another 4bp (as it did on Tuesday) to B+143bp, for example. The high yield market also weakened, the index popping 11bp wider to B+505bp representing the same amount of spread widening as recorded on Tuesday. Things might be different on Thursday.

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.