2nd August 2020

👣 Feet up for summer

iTraxx Main


iTraxx X-Over


🇩🇪 10 Yr Bund

-0.53%, +2bp

iBoxx Corp IG

B+136.8bp, unchanged

iBoxx Corp HY

B+498bp, unchanged

🇺🇸 10 Yr US T-Bond

0.53%, -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″]

But difficult to put pandemic behind us…

The fat lady’s been belting out the tune at the top of her voice. It sometimes feels like it’s all over. European country GDP numbers for Q2 were worse than feared. The US economy contracted by almost a third year on year, or some 9.5% quarter on quarter, in Q2. Relations between the US (and increasingly by the ‘western’ world) with China are deteriorating by the day.

We have regional lockdowns to contend with as the virus continues to spread at an alarming rate. The pandemic will continue to define our Q3. The earnings season in the meantime has come in as expected – weak earnings generally, albeit with a few bright spots. But markets are hanging in there. Year to date performance has recovered well after taking that early Q2 battering.

One could reasonably argue that risk assets should be on the floor. They’re not. One reason is because of the copious levels of liquidity still needing a home but second, few are prepared to bet against some sort of vaccine receiving regulatory approval.

Equities are choppy but haven’t quite played into the weak macro recovery narrative, yet. Rates are rallying after the latest musings from a dovish Fed, the suggestion is we can look forward to some further policy easing come September. That might be enough to keep risk assets propped up through August.

Credit spreads are treading water waiting for some clear direction elsewhere in which to launch their next big directional move. Corporate primary, save for a few high yield deals, is closed for the summer. We think markets will open proper in the last week of August.

Primary effectively closes

After a massive opening day of July (€6bn issued by Bayer), the IG non-financial corporate bond market largely failed to follow through and we ended with just €15bn issued. That record-breaking Q2, with €50bn+ issued in each of April, May and June is unlikely ever going to be repeated. For the year to date, the €275bn already issued represents the second-best volume of deals – for any year – with close to €400bn still possible for 2020.

The pandemic response by corporate treasury desks has been to load up on cash. The cost of the debt for IG borrowers has been – and is still – very cheap. That’s not going to change. Investors have shown that they have plenty of cash still to put to work and will be willing funders when we reopen for business in late August.

The same can’t be said for the high yield market, in terms of market closure. July has been a relatively busy month, with over €9bn issued making it the best July month on record. And for the year to date, the volume level has passed the €50bn mark.

After recording zero deal flow from Feb 20 until April, this market has recovered well. We should probably be thinking in terms of record issuance for the year, with just €25bn needed between now and year-end to surpass last year’s €76.4bn record annual high yield issuance.

Senior bank issuance for July came in at a paltry €3.25bn, from just three issues. We ought not to have expected much more anyway given that central bank cheap funding windows are open. Still, we are up at €95.5bn for the year to end July, but we should be looking to pare back expectations of anything exceeding €150bn for the full-year.

Clawing back the losses

IG credit, as measured by the iBoxx index, returned +1.4% in July on index spreads some 20bp tighter in the month. There was less primary supply than expected, equity markets rallied early on and helped spreads tighten, while the weakness/volatility in equities later in the month didn’t feed through into widening spreads. For the year to date, IG credit is back in the black, with total returns now at +0.3%.

The rally in the underlying has helped boost those total returns, where the Eurozone sovereign index has returned 3% in the first seven months of the year.

In high yield, spreads on the index tightened by 40bp and total returns in July posted +1.7%, which helped the continued recovery of the sector following those big losses in Feb/March. Total returns year to end July have improved to -4.1% for the HY market

Ahead of the pack in corporate credit, is the sterling bond market. The huge rally in Gilts and another 18bp of tightening in the index helped returns higher, adding +1.9% in the month and for the year to end July, total returns stand at +5.1%.

Other markets have seen the S&P haul itself back into the black for the year to the end of July, now up by 1.2%. The Dow, weighed down by old industry stocks, is still 7.4% lower in the same period, while a bad few sessions in particular for the FTSE at the end of the month sees it 21.8% lower.

The same goes for the Dax which has flirted with getting into the black of late, but finds itself 7.1% down year to end July and the €Stoxx50 which is 15.3% lower after seven months of 2020.

The opening couple of weeks of August will play to the headline risks around the virus and Chinese tensions. A low investor participation rate across all markets will possibly see exaggerated moves across them. In credit, we will likely have several high yield borrowers print, any IG prints will be extremely opportunistic before we get back to work, most likely during the final week of the month.

As it stands, markets have recovered well from the Q1 blowout and are pinning their hopes on further policy accommodation – especially from the Fed (in September) and those vaccine hopes. Most will sit tight for these next few weeks.

We will be back again with more towards the end of the month, or before if events warrant it. 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.