28th June 2020

🎖️ High Yield Market Fighting On

iTraxx Main

71.8bp, +2.3bp

iTraxx X-Over

407.9bp, +10.9bp

🇩🇪 10 Yr Bund

-0.48%, -1bp

iBoxx Corp IG

B+156.4bp, +1bp

iBoxx Corp HY

B+539bp, -1bp

🇺🇸 10 Yr US T-Bond

0.64%, -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″]

Headwinds aplenty, but liquidity supportive…

Well, ams AG tripped up. Such is the edginess particularly around Germany Inc after Wirecard’s demise, investors had every right to reassess their allocations to the high yield borrowers deal last week. We move on, but it is a rollercoaster ride at the moment.

That’s chiefly because Covid19 outbreaks/lockdowns are sullying the mood, injecting uncertainty into the markets, no doubt affecting the quality of the recovery.

That said, the data is becoming increasingly supportive of that recovery – of sorts, and will win out in the end. That point though might be several months away meaning that the summer of content we had hoped for might not be a given.

Whatever ‘alphabet letter’ ultimately determines the shape of the recovery isn’t going to be too important in the very near term. We think Q4 will need a clear upward trajectory though to ultimately rescue this year’s performance.

That uncertain near-term outlook plays into the narrative espoused by the ECB’s Christine Lagarde on Friday, where she cautioned that the rebound would be ‘uneven… incomplete…. and transformational’ – but, that the Eurozone had seen the worst of the crisis.

So we are close to the end of the first half of the year, jolted by Covid19, down and out but then dusting ourselves off for the long haul ahead. However, risk markets have had a super recovery since prices hit the depths in mid-March. It’s been a very good quarter to get to this point.

We have just two sessions to go, and the performance numbers for the quarter show that the FTSE added 8.7%, the Dax a massive 21.6% and the S&P over 16%. They’re nowhere near flat year to date, but that target will only come into view (as it did in early June), if we can get a grip on the virus second wave outbreaks.

Credit has followed suit, although performance has come off a little since the mid-June tight. IG cash, as measured through the iBoxx index, is 17bp wider in the last 3 weeks, the index at B+156.4bp. But, in total return terms, IG is up 5.4% in the quarter to date. The AT1 market has returned almost 15% in the same period and the high yield market some 11.4%.

Tiptoe thru the storm

Friday’s session fizzled out after much earlier promise. Credit primary had just the one deal, there was not too much on the economic front to motivate direction, and so the Wirecard debacle was managing to get most of the headlines.

With the UK economy now opening up, the FTSE was on the front foot for the whole session and managed to add around 1.5% before the US markets dropped by that amount and dragged European equities lower. The FTSE index still added 0.3%. The Dax also was in the black earlier, but actually closed 0.7% lower.

As for the US, the S&P eventually lost 2.4% but managed to hold the 3,000 level. Virus/lockdown headlines will likely determine how the market develops this week. Thereafter, we’re into the Q2 earnings season.

We had a bit of a mixed session in rates in last week’s final session. The 10-year Gilt yield rose to 0.17% (+2bp). The Bund yield in the same maturity was lower at -0.48% (-1bp) and the US Treasury closed to yield 0.64% (-2bp).

In credit, Wolters Kluwer was the sole corporate borrow in the session as it priced a €500m 10-year at midswaps+100bp, which was 40bp inside the initial guidance off a book in excess of €3bn. As for the ams AG deal, it looks as if it will be priced likely Monday.

And we also have a very interesting deal from ThyssenKrupp to look forward to.  That being the multi-tranche, multi-billion leveraged buyout-related transaction that is surely going to test the nerves of every high yield investor. In the eye of the Covid storm, this most covenant-lite of offerings has almost no protection for bondholders – but starved of decent coupon income, cash to put to work and a fear of missing out – the deal will go great guns!

Anyway, the Wolters deal took the weekly IG non-financial issuance to €9.7bn, and up to €44.2bn for the month. There is Takeda to look forward to and we are sure other opportunistic borrowers could pop up on Monday and Tuesday making for June’s issuance rise to €50bn.

This comes after the record €57bn in May and the €56.95bn in April. At €158bn, it is already a record level of issuance for any quarter.

The cash market closed unchanged with the iBoxx IG index at B+156.4bp and the high yield index at B+539bp. The latter is holding up very well given the Wirecard fraud, the ams AG hiccup, dissent around the loose (or actually barely any protective) covenants on the ThyssenKrupp deal to come and expectation that defaults are going to rise in H2 2020/2021. That’s some feat.

As for this shortened week because of the US Independence Day holiday, there’s enough to chew on. Month-end/half-year will see portfolio squaring up trades but we have plenty on the macro front as well. China reports industrial profits for May and we have the important Caixin manufacturing PMI.

In Europe, there are a bunch sentiment surveys (economic, industrial and services) as well as flash inflation data for June and the unemployment rate. For the US, its PMIs and then on Thursday, an early release of the non-farms and unemployment report. The former is forecast for around 3 million job additions, and the unemployment rate is set to drop to 12.3% (13.3% previously).

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.