30th June 2020

🍷 Glass is half full

iTraxx Main

66.2bp, -4.1bp

iTraxx X-Over

380bp, -16.8bp

🇩🇪 10 Yr Bund

-0.48%, unchanged

iBoxx Corp IG

B+156.8bp, -1bp

iBoxx Corp HY

B+539bp, -2bp

🇺🇸 10 Yr US T-Bond

0.65%, +2bp

🇬🇧 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″]

Thanks to the central banks…

It’s been a fine recovery-quarter overall, investors relieved that the markets managed to bounce back, taking in the best quarterly performance for several asset classes. And that, just as the coronavirus pandemic threatened financial armageddon. Concerted loosening of policy by central banks/governments did the trick, again. And so the market’s ‘cold turkey’ moment has been put off, again.

However, there remains a high level of uncertainty everywhere and we end the quarter with the WHO warning that the ‘worst is yet to come’ on the coronavirus pandemic. We still will see some volatility as the world reacts to the approval of China’s national security law in Hong Kong. But we in the midst of a raft of improving macroeconomic data, the latest showing that Chinese manufacturing is gathering a head of steam.

In the high yield markets, concerns have seemingly been brushed aside as well after the Wirecard debacle, although there have been additional jitters on the whiff of scandal around the ams AG deal (although it eventually got away). Needs (yields) must after all. Nevertheless, given the immediacy of the numerous challenges, corporates have been not been waiting to get additional liquidity on board. In the primary non-financial IG market, for example, we have easily just completed the most fantastic quarter in its history.

Another €50bn+ month!

It’s been a record-breaking quarter for IG non-financial primary markets. We closed with June ending as being the third successive month of issuance topping the €50bn mark – which is a clear first in the history of the European corporate bond market.

For April we saw €56.95bn of debt issued, in May it was just a shade ahead at €57bn and a fresh monthly record, while in June we got over the line with €50.4bn printed. The three best months in the Eurobond markets history. July’s issuance in the past few years has typically been in the €10bn – €20bn area, but this time we might be looking at the upper end of that range.

The reasons for the huge levels of issuance over the past few years have been numerous and fleshed out previously. The current record run rate is motivated by a new reason, and one we can to add to the list – coronavirus-driven economic uncertainty.

Nearly €260bn of deals have graced the IG non-financial market in the first half of this year – which is just about the long term annual average! In 2019, we set a new record of €318bn for the year. We are set to slow through July and August, but there will still be deals and quite likely ahead of what we might have expected in a normal summer period.

For the full year, we must be looking at somewhere close to €400bn, as seasonal effects (summer/year-end) see a reduction in the run rate from the current – we think – unsustainable levels.

The deals that took us over the line came from ISS which issued €500m in a 5-year at midswaps+170bp (30bp versus IPT, books just €2.1bn) and then the dual-tranche offering from RTE. The French borrower issued €500m in a 12-year at midswaps+77bp (-28bp versus IPT) and €750m of a 20-year at midswaps+110bp (-25bp versus IPT) off combined books of €3.4bn.

In the high yield market, the final session of the month saw pricing of the ams AG deal (again), ThyssenKrupp’s deal got away after sponsors ceded to pressure from investors to tighten up some of the covenant language and Fiat Chrysler added a triple-tranche effort of its own to the tally.

In high yield, we ended with a flourish with ams AG selling a reduced €650m at a higher 6% yield for their 5NC2 – paying the price caused by the ructions of a possible scandal. ThyssenKrupp issued a 3-tranche in euros and two in dollars for their deal. €1bn was priced to yield 4.375% for a 7NC3 structure, €500m in a 7NC1 floater was priced at Euribor+475bp and €650m was priced to yield 6.625% for an 8NC3 deal.

However, and unexpectedly, we had a trio of deals from Fiat Chrysler. The auto giant issued €1.25bn in a 3-year at a yield of 3.375%, €1.25bn in a 5.5-year at a yield of 3.875% and €1bn in an 8-year to yield 4.5%.

That huge final day volume took the monthly issuance to €13bn and to €41.2bn for the first half. Given that we saw nothing issued in the 6 week period from the latter part of February to the end of March, the recovery in the market with such high volume of issuance is some feat.

There is a considerable pipeline and clearly the demand is there for higher-yielding corporate bond risk. Dare we start thinking terms of breaking last year’s record €76bn, again? It’s quite possible.

Senior bank issuance for June came in at €10.45bn, with Euroclear bank the sole borrower in the month’s final session, as it offered €500m in a senior preferred priced at midswaps+58bp for the 5-year maturity. That level of issuance is about the long term average for June, but we ought not to have expected much more anyway (last year’s came in at almost €25bn) given that central bank cheap funding windows are open. Still, we are up at €92bn for the half year, but we should be looking to pare back expectations of anything exceeding €150bn for the full-year.

Q2 performance delights

The first half looked like being a disaster as we closed Q1 with huge losses and seemingly little signs of stability let alone recovery. But the markets fought back as they played into the injection of liquidity into the global financial system. Right now, we are grappling with localised outbreaks amid more sinister Covid19 contagion across several countries (India and the like). But markets are trying to push higher, hoping that re-opening of economies can broadly be sustained through the second half.

The final sentiment surveys of the first quarter suggest both the consumer and businesses are beginning to believe, although the defining quarter for the whole year will be the final one. That’s when the weather turns, and the virus might return with a vengeance.

In a nutshell, Q1 was a shocker. The European equity indices have up circa.25% across the board. The S&P was down 20% for the quarter and the Dow some 23%. Oil prices were battered. In credit, the story was just as bleak. The IG market saw spreads widen by 150bp to B+252bp (iBoxx index) in the quarter, with total returns at -6.2%. It was worse lower down the totem pole, with the AT1 market off by 18%, and the high yield market gave up 15.2%.

We’ve seen a super recovery since that opening quarter’s losses. In fact, we closed the second quarter with the Dax out in front, up by over 23% with the FTSE almost adding back 9%, and the S&P close on 8%. All of that in the April – June period. In credit, the second quarter has been kind, too. Investment grade credit (iBoxx index) has returned 5.2%, the AT1 index returned 14.2% and the high yield market 11.3%.

So for the first half, things look a little more respectable and palatable after that Q2 bounce. The S&P is now just -4.7% lower in the six month period having briefly dipped back into the black before the virus’ spread across the US spooked. In Europe, the FTSE is still 18.2% lower though, the Dax just 7.1% and the EuroStoxx50 slower by 13.7%.

Credit’s recovery leaves total returns for the IG market (iBoxx index) at -1.2% for the first half of the year, on spreads recovering to being 52bp wider than they were at the start of the year. AT1 total return losses now sit at -6% with the high yield market slightly ahead with total returns of -5.6%, all for the first half of 2020.

The Gilt market rally has boosted the sterling corporate bond market’s returns, recording an outperforming +3.1% in the first half. The Eurozone’s sovereign market comes up next, delivering total returns (on index) of +2.3%.

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.