6th September 2020

🗞️ Gravity Will Get You Down

MARKET CLOSE:
iTraxx Main

53.4bp, +1.2bp

iTraxx X-Over

325.9bp, +2.6bp

🇩🇪 10 Yr Bund

-0.47%, +2bp

iBoxx Corp IG

B+124bp, +0.5bp

iBoxx Corp HY

B+452bp, unchanged

🇺🇸 10 Yr US T-Bond

0.72%, +4bp

🇬🇧 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″]

Resistance proves futile…

Up by the stairs. Down by the elevator. A sharp drop in equities in last week’s final couple of sessions left tech investors trudging through the trenches, and it must have felt like armageddon for some. It’s not. Some sections of the markets had gotten ahead of themselves.

Our view remains the same; The trend is still for risk asset prices to rise. US markets were always going to let off some steam, and what came into view was the price level of the tech sector. Everything else didn’t quite follow to the same extent as those particularly large falls observed in US markets. Credit certainly didn’t. Spreads have actually displayed commendable stability. And primary is still functioning.

However, it feels like it has been hit and miss in primary affected by being a 4-day week. We’re firing, but not quite gung-ho yet, that is.

The overriding feature of the recent deal flow has been the balance sheet ‘fortifying’ transactions in the non-financial corporate sector. That is, we count ten corporate hybrid transaction since we resumed business 2 weeks ago. The more ‘plain vanilla’-like deals have been missing with just Daimler, American Tower, Glencore, Schipol and Adidas pitching their wares.

Nevertheless, those hybrid deals won’t be scoffed at. Most would argue they’re better for both the investor and issuer. In this low yield environment, which is odds-on going to stay for many more years to come, subordinated debt of solid large, blue-chip corporates is most welcome given the higher coupon versus senior deals. For corporates, it’s just cheap equity.

We have seen that the demand for the deals is extremely robust with typical subscriptions exceeding 5-7x the size of the eventual print.

With still the best part of four months to go before year-end, the record run-rate has the €285bn of IG non-financial issuance equalling the second-best for any full year. Non-financial IG corporate supply is running down last year’s €318bn record at some pace. Such are the inflows adding to already high cash levels which need to get invested, secondary spreads also managing to hold firm amid that primary onslaught. For now, a clear ‘win-win’.


Encouraging Employment Trend

Labor Day in the US on Monday will likely see markets kick off with a quieter start, although we would not be surprised if the odd borrower does print. If not, it is going to be about cramming deals in on Tuesday and Wednesday ahead of Thursday’s ECB monetary policy meeting/press conference/statement.

The ECB isn’t expected to change anything but markets will be looking for clues as to how the various bond purchase programmes might evolve (be expanded, that is). The region, after all, has a deepening inflation (rather lack of) problem which needs urgent attention, amongst several other issues. New economic forecasts from the bank are published this week.

Otherwise, we are quite light on the data (Eurozone GDP for Q2, China trade numbers), so we probably give the next round of Brexit trade talks some focus as that crucial year end cut-off date comes into view.

We closed last week witnessing some volatile US equity markets which managed to climb off the intraday lows to finish 0.8% lower for the S&P and just 0.6% lower for the Dow. The brouhaha is all around the tech sector and ‘whale’ trades, but that non-farm number was a good print, and at the moment we might just be looking at something close to a V-shaped recovery in the US.

The US has added back over 10 million of the 22+ million jobs that were lost, while the unemployment rate has dropped to 8.4% from over 14% at the height of the pandemic. That trend should continue as Covid-19 cases drop, hospitalisations decline and the economy continues to open up.

In credit, Italy’s ERG was the sole corporate borrower lifting €500m in a 7-year maturity at midswaps+95bp (as a reminder, the coupon was just 0.5%), where final pricing was 40bp inside the opening talk and which saw interest for the issue of €2.6bn.

In secondary, the IG index edged just 0.5bp wider (noise) to B+124.4bp through a lacklustre session, for which subdued levels of activity has become the norm now. The resilience, however, of the credit market was also seen elsewhere with the AT1 index barely changed (B+601bp, +5bp), while the HY market was completely not interested – unchanged at B+452bp (iBoxx index).

Even the synthetic indices were relatively unmoved, with iTraxx Main at 53.4bp (+1.2bp) and X-Over just 2.6bp higher at 325.9bp.

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.