23rd July 2020

🌬️ Headwinds, but we’re working through them

iTraxx Main

57.8bp, -0.3bp

iTraxx X-Over

339.4bp, -3.6bp

🇩🇪 10 Yr Bund

-0.48%, +1bp

iBoxx Corp IG

B+134.5bp, -1bp

iBoxx Corp HY

B+485bp, -9bp

🇺🇸 10 Yr US T-Bond

0.59%, unchanged

🇬🇧 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…

In credit, there isn’t too much going on, save for a gentle squeeze taking IG spreads back to levels last seen in early March, taking in a 21bp tightening so far in July. The recovery in the high yield market is a little more circumspect – which is understandable, but with the iBoxx index now at B+485bp it is 40bp tighter this month so far. And the AT1 market, buoyed by those US bank earnings of last week, has seen index spreads tighten by 84bp this month.

Of course, it has come against the backdrop of equities managing to rally of late, managing to get to flat year to date, earlier this week. The earnings season has just about been what we might have expected, but the outlook for Q4 and recovery beyond is almost totally dependent on the path the coronavirus epidemic takes.

The economic stimulus has been applied. And the global economy is getting close to the maximum dosage. If the virus isn’t bought under control soon, it threatens to be a bleak autumn/winter. The development on the vaccine front is very encouraging though, but much still hangs in the balance. The renewed strength in the bid in rates is telling us that, with bonds rallying even as equities do.

So as equities have been heading back into the black in several markets for 2020, credit has hitched along for the ride and seen some good performance too. Primary, though, has slowed markedly and doesn’t look like it will be coming back to life anytime soon.

Records have been broken in this recent issuance run through Q2, but the paper has been taken down well. Given how we have slowed in July, we must now be looking for a reopening in the market towards the end of August. Opportunistic borrowers might be on the screens until such time, however.

July’s IG non-financial issuance now sits at €14bn which is €1.2bn behind last year’s figure. August in the previous two years has been very busy, some €18bn and €20bn issued in 2018 and 2019, respectively. The markets did reopen with a flurry of deals in the final week of those August months, with borrowers looking to get deals away ahead of the September rush.

There have been odd deals but nothing to excite since the month’s opening €6bn multi-tranche offering from Bayer. In high yield, the market is ticking over and the pipeline is decent, with pub operator Stonegate due likely on Friday in sterling and euros. Should they price, it will have been the only deal this week, although we have had €6.5bn issued already this month.

Credit performance YTD has seen a decent recovery this month so far. In IG, total returns are back to flat. Just. The high yield market has come likewise recovered to return -3.7%, while the total returns for the AT1 index are at -3.2% for the year to date.

The screw tightens, but…

So, the next few weeks will be about the vaccine trials, lockdowns and China – US/UK relations. For the moment, on the latter, the Chinese reaction seems fairly muted against a whole host of issues facing them. The Houston consulate closure (accused of being a spy base), sanctions against Chinese officials involved in the Uighur incarnations, the burning issues around Hong Kong – to name but a few – are all adding to a sizeable crib list against the CCP.

A Chinese reaction will come, but the risk is that they alienate themselves even more, which they could probably ill-afford to do. The west is in the process of ramping up the pressure. Of course, the best outcome would be for a de-escalation in tensions, but it seems as though that will need to come from the lack of any reciprocal action from the Chinese at this point.

It’s not all bad. There are the stirrings of life in the European housing market. Manufacturing took a hit in the UK but reports suggest a brightening outlook, which was corroborated by upbeat confidence reports in French manufacturing. The US weekly jobless claims rose a touch to 1.4m as disruption across California, Texas and Florida slowed the recovery process. On the upside, continuing claims fell again to 16.2m now from 17.3m previously and a peak of almost 25m back in May.

The S&P equity market has hauled itself back into the black for the year (as at the time of writing), the Nasdaq is going great guns and in their slipstream, the Dax has been trying to push for that positive level (again) for the year.

In credit, iTraxx Main was at 66.2bp at the end of June with X-Over at 380bp, while last week those levels improved as the cost of protection fell to 61.6bp and 367.5bp, respectively. Now, they have nudged lower again – currently residing at 57.8bp (Main) and 339.4bp (X-Over). There are signs of compression again with the ratio between them at 5.87x.

That’s it for the moment. There are severe headwinds that are both geopolitical and virus related. Both of those issues will likely be the main drivers for market direction over the next few weeks. Secondary market illiquidity will likely push levels disproportionately as a result, but we shouldn’t necessarily be looking to resume business in late August on the back foot.

That’s it for the moment. Given the lack of market activity into the holiday period, we will be back again toward the end of the month barring anything of note. 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.