13th May 2020

🇩🇪 Germany Inc. steps up the pace

iTraxx Main

87.7bp, +3.8bp

iTraxx X-Over

518.9bp, +16.1bp

🇩🇪 10 Yr Bund

-0.53%, unchanged

iBoxx Corp IG

B+201.3bp, +2.5bp

iBoxx Corp HY

B+xxxbp, -+xbp

🇺🇸 10 Yr US T-Bond

0.64%, -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″]

Indigestion and too rich, but still gluttonous…

Primary credit markets continue to burst at the seams. It’s not often, in crisis conditions, that we get a HY borrower rated in the mid-single-B area manage to print an upsized deal (from €400m) of €850m! In the IG non-financial market, corporate treasury department suspicions lurk as to the macro outlook, because the deal flow continues at a record run rate.

The IG non-financial market has already seen €190bn issued this year, €37bn of it this month so far. The record month was April, when €57bn got away. The record year was 2019, with €318bn printed. It has to be fear of the post-June/maybe post-summer period. Get the cash on board, worry about holding it at negative rates another time. There’s nothing particularly smart in the process; It’s just fear and following of the herd.

New issue premiums are declining. It’s not gone unnoticed that deal over-subscription levels are falling. Or that final pricing is tightening by less. We’re also seeing less performance on the break. So, we probably have a bit of investor indigestion and deals being priced a little too rich to start – for the market we’re in. We still want to bag a bargain. Secondary credit, in IG, isn’t performing anymore after all.

Germany Inc rules over primary

It was as if Merkel had ordered a three-line-whip to her corporate sector to get that funding in because we had triple-tranche deals from E.ON, Daimler and Deutsche Post. That trio took the issuance from Germany IG non-financial corporate Inc to near-on €31bn for the year – or 16.3% of the total supplied. French corporates still lead, prolific at well over €51bn of debt issued from them so far this year.

IG Issuance by country in 2020 so far

2020 IG Issuance to May 13th

Overall, for the month to date, we now have had a remarkable near €37bn issued from IG non-financial corporates as we approach the halfway stage.

Daimler issued €1bn in a 3.25-year maturity at midswaps+200bp (-25bp versus IPT), took €1.25bn in a 6.25-year tranche at midswaps+240bp (-25bp versus IPT) and €750m in a -year at midswaps+255bp (-30bp) with combined books for the deal up at €6.8bn. Partially state-owned Deutsche Post issued three €750m tranches, in a 6-year at midswaps+75bp (-20bp versus IPT), 9-year at midswaps+95bp (-25bp versus IPT) and 12-year maturity at midswaps+110bp (-15bp versus IPT) on combined books of just under €4bn.

Finally, for the German-based corporates, E.ON took €1bn in a short 3-year at midswaps+80bp (-25bp versus IPT), €500m in a short 8-year maturity at midswaps+110bp (-20bp versus IPT) and €500m in a long 11-year green bond also at midswaps+110bp (-35bp versus IPT). The total book size for the deals was at around €4bn.

Amadeus IT’s deal didn’t seem too fancied. The Spanish travel-booking provider issued €500m in a 4-year at midswaps+285bp (at IPT) and €500m in a 7-year at midswaps+315bp (-10bp versus IPT) with combined books at just €1.75bn. Telefonica issued €1.25bn in a 7.25-year at midswaps+145bp and €750m in a 12-year at midswaps+190bp, with final pricing 15-20bp tighter versus IPT across the trances on combined books of €3.4bn.

In high yield, PPF Telecom Group issued €500m in a 4-year deal priced to yield 3.6%, and Rubis Terminal was also in the market for a possible €410m in a 5NC2 structure.

Getting hairier by the minute, again

Risk markets were under pressure from the start. Fear of second wave transmissions across Europe and in China and South Korea, and re-opening of the economy across numerous US states looking like it might too soon were enough to warrant a defensive posture.

We had news that Trump had ordered the Federal pension fund to stop investing in Chinese stocks – while reports that German intelligence had found evidence that China suppressed the severity of the virus and pressured the WHO were front-page tabloid news. There were the usual reports (this time from the FBI and CISA) of hacking by Chinese groups of US research facilities investigating virus vaccines and the like.

UK GDP in March plunged a record 5.8% and the usual economic indicators for March (construction activity, investment, manufacturing production, retail sales) were a sorry sight. But they were expected to be. And the same could be said for the collapse in the Eurozone’s industrial production in March, falling by 11.3% in the month, and by 12.9% year on year.

For once we had a classic move in prices. Risk assets weaker, safe-havens better bid. And the weakness across risk markets accelerated as the Fed’s Powell suggested long term damage to the US economy as a result of the virus pandemic.

Equities played out in the red. The FTSE closed 1.55% lower, the Dax 2.6% and, as at the time of writing, US equity markets were up to 2% lower.

The 10-year Treasury yield, therefore, dropped 5bp to 0.64%, the Gilt in the same maturity to 0.21% (-4bp) and the BTP to 1.80% (-7bp). Bunds were unchanged to yield -0.53%. iTraxx Main moved to 87.7bp (+3.8bp) and X-Over to 518.9bp (+16.1bp) which were some of the largest moves in the Main index for a while.

Secondary cash was similarly under some pressure, again. Spreads have been edging wider for a week now, or at least not being supported into any selling cares. The iBoxx IG index was up at B+201.3bp (+2.5bp) and the widest level for 3 weeks. The sterling market has been outperforming, the index at G+211bp (+1.7bp), notwithstanding the several deals in Tuesday’s session.

In the higher beta sectors, pretty much the same picture but again, all on the back of any real interest to get involved. The AT1 market was better offered for choice, with the index left at B+899bp (+17bp). Admittedly, the high yield market is doing relatively well. The flow and volume is low, but we are not seeing any massive weakness, the index at B+660bp (+4bp).

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.