26th May 2020

🗞️ Headwinds, but markets bullish

iTraxx Main

73.2bp, -6bp

iTraxx X-Over

444.3bp, -32.4bp

🇩🇪 10 Yr Bund

-0.43%, +6bp

iBoxx Corp IG

B+186.5bp, -8bp

iBoxx Corp HY

B+613bp, -20bp

🇺🇸 10 Yr US T-Bond

0.70%, +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″]

We shall overcome…

The relief trade is in full swing. Relief that the global economy has started the engines and that we are getting back to business, albeit some of the mood might be tempered by ongoing second wave virus and US-Sino relationship concerns. At the moment, equities are flying in anticipation. The S&P is through 3,000 again and most are bourses closing in on 10% down for the year versus 30% or more (-36% Dax) back in late March.

Business sentiment is on the rise. The hard widget data will follow. We have seen the bottom in April, May’s numbers won’t be good while June should see us on a positive recovery trajectory.

Surprisingly, credit markets have been holding very well. IG spreads might have baulked at the huge supply, but they have not – and high yield markets especially – played into the usual narrative of crisis/investor exit/no bid/spread collapse.

There is a good chance that we will forego the usual holiday lull and it is confined now to a 2-3 week period in August. The clock, so to say, stopped and has thrown us out of sync. The reset period for the markets might well be June and July as we play catch-up.

In credit, expect the primary market to slow from the breakneck pace of deal flow seen through April and this month, but we anticipate an above average amount of activity through June and July.

If the macro outlook continues to brighten and fears of a second wave prove to be unfounded (this might happen quickly), then HY rated corporates will chance their arm and feed into the improved tone. They’ve so far been extremely opportunistic, having to pick their moments amid the vagaries of the prevailing mood music.

Record supply month touch and go

The total for the month of IG non-financial corporate bond issuance is at €48.1bn and now leaves us just €9bn short of April’s record issuance month. There are three sessions to go and we could get there with a couple of €4bn+ days or so. There is a pipeline after all, amid the flurry of opportunistic players waiting in the wings.

These are big moments for the primary markets highlighting a greater reliance on the capital markets, amid the ongoing high level of funding disintermediation (away from bank load markets). And it all appears sustainable.

Records and the like are for the headline writers. Investors are getting their fill of deals. Inflows are being satiated. And we are getting some performance, although that can be erratic. It doesn’t appear that the market is heading for a burnout just yet, even if the oversubscription/new issue premium/tightening versus IPT dynamic isn’t as effusive as it was during April.

As for Monday’s session, there were  few deals. Of note, senior financial issuance came from BFCM which issued €1bn of a 10-year senior non-preferred at midswaps+143bp (-32bp versus IPT), while Severn Trent Utilities got £300m away in a 20-year sustainable issue at G+1245bp (-15bp versus IPT). Flemish region owned Aquafin issued €125m in a 10-year green bond at B+105bp.

Market to end May with a flourish?

There was much in the session for the markets to get their teeth into, and rally. Lufthansa agreed its €9bn bailout (EU expected to rubber stamp) while easing travel restrictions boosted holiday firms. We might be getting ahead of ourselves, but such is the level of the global stimulus, the patients’ recovery might go into a mini-overdrive as it starts.

There were even soothing words from the senior Hong Kong legislator on Beijing’s proposed security laws. And after our close, the French unveiled an €8bn motor industry recovery plan. Small wonder that we feel comforted at the moment.

The FTSE closed 1.2% higher, the Dax added another 1% after rising by 2.8% on Monday. As at the time of writing, the S&P was at just off its highs for the session, at 3,013 (+2%).

In rates, the market was better offered and the 10-year yields saw the benchmark Gilt rise to 0.21% (+4bp), the Bund was at -0.43% (-6bp) and the Treasury yield rose to 0.70% (+4bp).

The cost of protection continued to crunch lower, playing into he more optimistic mood in the markets. So iTraxx Main was 6bp lower at 73.2bp and X-Over moved 32.4bp lower to 444.3bp.

In the secondary market, tightening. Lots of it! The IG index moved 8bp tighter, a squeeze reflecting that better mood, leaving it at B+186.5bp. There was a crunch tighter also in the AT1 market, with the index dropping to B+798bp, or some 52bp tighter in the session.

And finally, in high yield, we’re at index levels not seen since before we gapped wider, in mid-March. We moved 20bp tighter at B+613bp. There is more to go, clearly.

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.