6th December 2020

🗞️ Go with the flow

iTraxx Main

45.3bp, -0.7bp

iTraxx X-Over

234.8bp, -8.6bp

🇩🇪 10 Yr Bund

-0.55%, -1bp

iBoxx Corp IG

B+101bp, -1bp

iBoxx Corp HY

B+356bp, -5bp

🇺🇸 10 Yr US T-Bond

0.97%, +7bp

🇬🇧 FTSE 100

6,550, +60

🇩🇪 DAX

13,299, +46

🇺🇸 S&P 500

3,699, +32

Teed up nicely for 2021…

In a super run of late, the S&P index is now less than one point away from 3,700. And the Dow index could – rather should – easily be above 30,000 when we reset the counter for 2021. More records for US equities will feed into an improved global equity narrative pushing record valuations in other markets as well.

Why not? Yellen’s back after all. Credit spreads will see record tights, we think. In IG, where the iBoxx index is currently at B+101bp (-3bp in 2020 so far), we are just 20bp of tightening away from a new record tight.

Activity is clearly slowing down. But importantly, as we draw near to a close for 2020, the outlook appears to be brightening. And market participants are in the mood to drive risk prices higher. There is a bullish mood about the place, and it won’t pay to bet against it. Vaccines are going to be administered very shortly and the subsequent rising tide of the economic recovery will lift all boats. Various records beckon through Q1 and Q2.

The risks, however, lurk. Lest we forget, the global macroeconomy was hardly firing on all cylinders pre-pandemic. Admittedly, we won’t have the disruptive influence of Trump, but equally, we do not think the new Biden administration will necessarily row back on Trump’s many international successes.

Nato members will need to cough up their 2% of GDP share to the budget, for example, but we also think putting China’s feet to the fire like he did on trade (accountability) will remain in place.

That we won’t have the reckless social media barrages on the aforementioned issues and others might help to assuage much headline event risk. Less volatility? That won’t be a bad thing.

Primary issuance coming to an end

We do not expect any more records in Primary. Surely, we cannot be thinking in terms of another annual record after smashing 2019 volumes? This market should have some sort of limit.

However, we are probably into the last ‘busy-ish’ week on the primary front. Thereafter, it will be a case of tying up loose ends. The heavy lifting has been done. Already, last week saw just €3bn of IG non-financial issuance with €2.1bn in the high yield market.

There was a big squeeze in final pricing for the deals, taking a lot of the juice out of the attractiveness of the initial pricing. That said, demand is so good as supply dwindles, one cannot really blame the leads for their pricing action. Frustrating as it might be for investors.

Last year was a record one for IG issuance with the total up at €318bn which itself had smashed the previous record from 2016 of €271bn. The current level of issuance is up at €358bn and we should be looking in the context of €362bn – €365bn for the full year at best. Interestingly, the US-domiciled issuer borrowing has dropped to only 15.6% of the total (short for the long term average), against 30% last year (see 2020 chart, below).

Perhaps the most surprising arena for deal volume has been the high yield market. Into a difficult year for macro where several economies are showing double-dip recession dynamics, where we have seen lockdowns which have impacted revenues and so forth – we have a record year for supply. Demand for higher-yielding paper has held up remarkably well.

We were in record territory for 2019 at €76bn, but issuance this year has already passed it, now up at €84bn and, given the pipeline, we should be in excess of €87bn by year-end. It has probably helped that covenant waivers, central bank policy accommodation and direct national measures (halting business rates, furlough schemes etc) have managed to keep the default rate at low levels – given the level of lack GDP growth.

Brexit-trade deal outcome looms large

The FTSE index performance lags other markets by some way at the moment, but the 15% or 16% needed from current levels to get back to record levels is not out of the question. After all, the index added over 12% in November. We need some movement on the Brexit trade front. We’re literally hours away from something.

The non-farm report was mixed and offered a firm reminder that the jobs market faces a long slog ahead, as the 245k job additions missed expectations by a long shot. However, the unemployment rate dropped to 6.7% (6.8% expected, 6.9% prior) and average hourly earnings rose by more than expected.

We still closed in extremely positive form last week. Equities were higher across the board, credit spreads tighter and the main sell-off in rates was concentrated on the US Treasury market. The 10-year is now yielding 0.97% and could possibly be trading off a 1% yield handle imminently. The equivalent Bund yields 0.55% and the Gilt just 0.34%, both barely changed last week.

In credit, IG spreads moved a basis point tighter leaving the IG iBoxx index at B+101bp (-3bp this year). The high yield market also tightened, by 5bp with the index now at B+356bp (-17bp last week) – and just 11bp wider for the year. HY total returns have moved further into the black, now up at 1.7% year to date.

For the indices, iTraxx Main closed at 45.3bp (-0.7bp) and X-Over at 234.8bp (-8.6bp), with the ratio between them compressing some more to 5.18x.

As for this week, Brexit takes centre stage with some conclusion expected on the trade talks. Of course, there will be a focus as well on the spread of the virus and whether huge inroads are being made into containing it. The various data flows take in US inflation, German industrial output as well as Chinese inflation and trade numbers.

We also have that ECB monetary policy meeting on Thursday, where everything is expected to stay unchanged in the rate sphere. We should get an update on the various QE programmes with odds favouring an expansion of the PEPP (another €500bn?) and possibly the TLTROs.

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.