24th March 2020

🌄 First of Many False Dawns

iTraxx Main

99bp, -19bp

iTraxx X-Over

607bp, -98bp

🇩🇪 10 Yr Bund

-0.33%, +5bp

iBoxx Corp IG

B+261bp, +2bp

iBoxx Corp HY

B+883bp, -29bp

🇺🇸 10 Yr US T-Bond

0.82%, +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″]

Timing is everything and nothing…

Are we reading this wrong? An extraordinarily positive day in equities, and a clutch at the proverbial straw of hope of a turnaround. There is a massive fiscal boost on the way in the US to augment the monetary one as well as the open-ended Fed purchases already announced. That will surely light the blue touch paper.

The virus will eventually be cured. And the ugly bit in the middle is an opportunity, isn’t it? That most likely will be determined on the shape of the recovery. The letters are all jumbled up, but the markets are pricing in a V-shaped recovery, not a U, W or L.

The borrowers hit the screens and investors piled in. The deals were cheap as chips. Irresistible. After all, the spread market had shifted/widened massively. It felt as if it was business as usual in the corporate bond market. New deal activity was bursting at the seams.

Sanofi issued a 10-year a year ago at midswaps+30bp, while Coca-cola printed a 7-year at around the same time at midswaps+40bp. Initial price talk for the deals a year on, into a coronavirus ravaged market, was midswaps+175bp and +240bp, respectively.

Of course, the new issue premiums are elevated versus the screen prices, but we’re not sure that’s what we should be looking at (and investors probably are not). It’s the big figure. After an extended period of extremely tight spreads, 150bp – 250bp or more for a solid single-A/double-A borrower isn’t going to be scoffed at.

And it’s as if few are worried that economic activity has collapsed. Judging by the record and unprecedented falls in activity as judged by the PMIs released during the session, for March – which will not capture the worst effects of the lockdowns, we’re already in a deep recession. We ought not to wait until the end of Q2 for the confirmation of it.

However, we can see some logic in getting involved. There’s perhaps a bit of short term pain, but long term gain. The levels are relatively good (too good to miss?), and it might be viewed as a case of getting in while you can because the expectation/potential for a V-recovery (when it comes) is rising with each monetary/fiscal stimulus that is announced.

There will be better entry levels we believe – and other opportunities, we wouldn’t be picking too many bottoms just yet! This is not the moment.

Primary: Needs must, corporates pay up

Given the recent state of the market, primary was raining deals. They were good, solid, well-known corporates. That’s what this market could only reasonably take now. And funding costs for them have ratcheted higher. And there is safety in numbers as investors pile in.

Nestlé issued €1bn in a 6-year at midswaps+130bp and €1bn in a 10-year at midswaps+150bp, with both tranches 25bp inside the initial guidance with combined books for the offering at a massive €12.8bn.

Sanofi issued €750m in a 5-year at midswaps+120bp and €750m in a 10-year at midswaps+150bp with that final pricing also 25bp inside the initial talk, of combined books at around the €15bn mark. And we had Coca-Cola European Partners print an increased €600m in a 6-year at midswaps+200bp (-40bp versus IPT, books at around €5bn). They last printed a 12-year at midswaps+78bp in September 2019!

The final IG non-financial borrower was Diageo. They took €750m in a 7-year at midswaps+200bp and €1bn in a 12-year at midswaps+240bp. Final pricing here was 15bp inside the opening talk across the two tranches off books at just €4bn, suggesting more modest interest for the bonds. The group also added a sterling tranche for £300m at G+255bp (-5bp versus IPT).

The senior bank issuance – the first this month – came from BofA, with €1.5bn issued in a 9NC8 priced at a whopping midswaps+365bp (just -15bp versus IPT)!

For what it’s worth, issuance in March to date is now up at €17.2bn in IG non-financials. Worth noting that the Spanish government issued €10bn in a 7-year, with demand up at €36bn for it. Slovenia issued €1.1bn (3-year including €250m tap of the 29s).


As suggested already, human nature/greed/fear of missing out has us wondering if we are calling it wrong, coming off the back of a huge risk market rally in the session. It is extremely rare that the Dax rises by 11.5% in any given day, the FTSE by 9.4% and US markets were up to 11.4% higher at the close!

That was some recovery. It does though shrug off the worsening situation in the US, amongst other countries (India’s 3-week lockdown of 1.4bn people, for example).

Rates were more modest in their corresponding sell-off. Much more. The 10-year Bund yield thus moved 5bp higher to -0.33%, the US Treasury yield added 5bp to 0.82% while in Gilts, the yield backed-up to 0.46% (+4bp).

The synthetic credit markets clearly played into the rallying markets, with the cost of protection falling aggressively. iTraxx Main protection dropped by 19bp to 99bp with the X-Over index 98bp lower at 607bp.

There was some respite in the cash market. IG spreads (iBoxx index) just managed a leak wider, with the index now at B+261bp (+2bp). The AT1 market, higher beta and following the fortunes of the equity market more closely saw a 75bp tightening in the index and it closed at B+1440bp.

The big winner for us though was the corporate high yield market, which tightened by 29bp leaving the index at B+883bp.

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.