30th November 2020

🗞️ Here we go again, Higher

iTraxx Main

48.9bp, unchanged

iTraxx X-Over

265.5bp, +0.5bp

🇩🇪 10 Yr Bund

-0.57%, +1bp

iBoxx Corp IG

B+104bp, unchanged

iBoxx Corp HY

B+372bp, -2bp

🇺🇸 10 Yr US T-Bond

0.85%, unchanged

🇬🇧 FTSE 100

6,266, -101

🇩🇪 DAX

13,291, -45

🇺🇸 S&P 500

3,621, -17

Bitcoin No1 so far…

Mostly, markets took a breather in the month’s final session and gave a bit back. But the end of month declines in traditional risk markets didn’t detract from a quite remarkable November for risk markets. Crypto led the way as Bitcoin’s sharp bounce back – after a significant, so-called ‘corrective’ tumble, which incidentally also leaves it as the overall winner for the year to date (price per coin over 250% higher). More broadly, the path of least resistance for most risk asset prices is higher.

We are not priced for perfection. But investors are buoyed by the US election result (back to political predictability) and the coronavirus vaccine developments (administered likely from next week). The latter which should help see an end to the dire macro situation, and where the only way is up/recovery in 2021.

Getting ahead of that macro recovery curve, cash is being put to work. Chinese recovery is leading the way, the latest manufacturing and services PMIs suggesting as much. Equities, we believe, will generally head higher through December and the S&P will possibly have a tilt at the symbolic 3,700 level, as the Dow finishes above 30,000 come year-end.

In credit, spreads ought to tighten some more into that better equity market outlook, and the IG iBoxx index spreads should make B+100bp (now at B+104bp) to close the year slightly tighter versus where it started. There is a good chance that the HY index will get close to flat for the year, with 27bp of tightening to go.

As for the Bitcoin, it would seem that the ‘information ratio’ around its trading dynamic doesn’t favour institutions versus retail. That’s rare. To an extent, everyone is in the dark for most of the time and any meaty, nailed on conviction isn’t derived because someone (or a particular group of layers) has a particular insight into flow dynamics. It saw a new intraday record pricing high during the day, but still fell just short of the $20,000 level.

Primary market record smashed

The corporate primary bond market has been the standout market this year. Through a pandemic and a recession, aided by a low rate regime in place forever (in financial market terms) and an investor hungry for yield, we’re at record levels of issuance. That’s in both investment grade risk as well as high yield rated corporate risk.

There is little worry at the levels of indebtedness being taken on board by corporate treasury desks swelling their cash balances to record highs as well. IG non-financial issuance as we closed November stood at €355.5bn for the year so far. That’s well ahead of 2019’s previous record level which approached €320bn.

In the high yield market, and despite a notable slowing in issuance (versus the year prior period) through October and November, the high yield issuance total stood at around €81.5bn and also ahead of last year’s then record of €76bn. The level of deal flow in this market, in particular, is all the more impressive given the hugely difficult macro backdrop.

Sitting pretty

A somewhat of a poor end to October cold have been a harbinger of things to come for November but markets instead embarked on a fantastic rally as vaccines hopes fed the risk-on trade.

The S&P set several closing record highs as it added over 10% in the month to recover to 12.4% higher for the year to end November. The Dow, languishing some 7% over in the year to end October, likewise recovered well, and having seen 30,000 for the first time in its history, was up 4.7% in the year to end November.

The DAX rose by double digits percentage points in November as well and is back in credit in the year to end November, by just 0.8%. And the FTSE, hammered in 2020 and lower by 26% to the end of October, has fared the best as the index recovered hard to close 15.7% lower in the 11-month period. This index could be one of the big winners in 2021, post-Brexit and into the macro recovery anticipated for next year.

That equities have had an excellent November, so too have rates – relatively. There has been no sell-off in Eurozone markets. Total returns in Eurozone rate markets in the period to end November are up at 5.0%, only exceeded in European fixed income by the longer duration sterling corporate bond market. For the latter, those total returns are at +6.9% in the 11 months.

As for the euro-denominated IG market, total returns are up at 2.6% in the year to end November and we would think in line with  – or in excess of, the most bullish forecasts made at the beginning of the year.

The AT1 market is also in recovery mode, returns for this market up at 4.0% year to end November. And the high yield market is back in the black, with total returns at 1.1% in the first 11 months of the year.

So in the final session, we had deals in primary from SNAM and Lenzing AG. The former issued €600m in an 8-year transition bond at midswaps+38bp (some -32bp versus IPT, books €2.6bn). As for Lenzing, the borrower went for a corporate hybrid deal, for an increased €500m in a PNC5 issue priced to yield 5.75%. That was 0.25% inside the guidance, off a book up at €1.6bn.

The FTSE lost 1.6%, the Dax 0.3% and the S&P was 0.6% lower at the time of writing. In credit secondary, spreads markets were unfazed. The IG iBoxx index closed at B+104bp (unchanged) and the HY index was 2bp tighter at B+372bp.

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.