24th August 2020

It’s Been a Yawn…But No Longer

iTraxx Main

53.7bp, -1.3bp

iTraxx X-Over

325.7bp, -6.6bp

🇩🇪 10 Yr Bund

-0.50%, unchanged

iBoxx Corp IG

B+125bp, -0.5bp

iBoxx Corp HY

B+467bp, -3bp

🇺🇸 10 Yr US T-Bond

0.64%, 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″]

Wake up, wake up…

Much of the month, for European credit market investors, has been a washout. But we’re back, not quite with a vengeance, but the deals are on the screens and we are off and running. The big question on everyone’s lips centres on issuance volumes. Do they continue at the previous pace, or have we simply brought forward the issuance?

Right now, coronavirus vaccine hopes are lifting the markets (again) and there is a bullish tone in equities, which has a good chance of carrying us into the end of the year. The S&P continues to set fresh record highs. And it’s all the rage now that there are legs in this rally. It might be a tech/pharma-related melt-up, but it will nevertheless drag other risk markets higher as well. Also, it might ultimately have some bearing but we’re not sure which, if any, Presidential candidate the market is discounting.

In the face of a record run of bond issuance, secondary credit has done its best to claw back much of the February/March spread losses. It’s been an impressive recovery even if the post ‘support schemes’ macro environment might look shaky. IG spreads as measured by the iBoxx index are just 21bp wider year to date (-140bp versus 2020 wides) and the HY index just 125bp wider YTD, recovering some 445bp from those March wides. They both just might recover to flat by year-end.

Primary re-opened on Monday with BNP and Commerzbank issuing senior non-preferred and senior preferred debt, respectively. Vodafone chipped in with a couple of corporate hybrid tranches. These deals were well received, but all eyes are on what’s to come. The appetite is still there judging by the pre-summer break receptivity to deals. Little should have changed since.

Primary re-opens, floodgates to re-open?

BNP issued €1bn in an 8NC7 senior non preferred at midswasp+95bp (-25bp versus IPT, books €2.25bn), to get the ball rolling. Commerzbank took €750bn in a 7-year senior preferred at midswaps+83bp (-22bp versus IPT, books €1.6bn). That was our fill of senior deals.

Most of the focus was on that Vodafone offering. The telecom group issued a couple of hybrids. The first was a 60NC5 structure for €1bn costing 2.625% which was 37.5bp inside the initial talk, and they issued another €1bn in a 60NC10 offering that was priced to yield 3.00%.  It was 50bp inside the initial talk.

Books for the high yield rated structures came in at €3bn and €4.25bn, for the deals, respectively. Of course, the overwhelming demand for these deals would have been from IG investors.

The deals took the high yield total for the year to date to €52.6bn, leaving the market needing less that €24bn to hit a new annual supply record. After zero issuance in March, barely €6bn in the 3 months March/April/May – that’s some going.

The euro-denominated IG non-financial market will reopen this week, with the sterling market usually lagging and set to offer its first post-holiday deal next week.

Records there to be broken

The optimism in the session came from the reported drop in Covid-19 cases in the US, the emergency authorisation of convalescent plasma treatment for coronavirus patients, and the potential for fast-tracking the vaccine being developed by AstraZeneca. Trump will be on a roll too this week as the  Republican convention kicks off, amid much rioting in several US Democrat-controlled states.

The S&P set a fresh record during the session (as at the time of writing) and is well past the 3,400 mark. 3,600 has been touted as the next stop, but such are the vagaries around the vaccine/lockdowns/infections that a positive outcome or expectation on that trio over the next couple of months could well have that index somewhere closer to 3,700. If that happens, the Dow will be through 30,000 without a doubt, although it is still some 1400 points off its early year record high.

In the US equity markets slipstream, all will follow. The Dax will have a good chance of meeting its own record high although the European equity rally might have the breaks put on it by the weaker recovery dynamic. The Fed is always going to be proactive and try to get ahead of the curve, assistance from the ECB usually comes after the horse has bolted.

The FTSE added 1.7%, the Dax well-over 2% and as at the time of writing, the US equity markets were up to 1% higher. Rates didn’t do too much, leaving the yield on the o-year Gilt at 0.21%, the Treasury at 0.64% and the Bund at -0.50%. The 10-year BTP yield closed at 1.00% and it has broadly been heading lower for several months.

Secondary credit didn’t do an awful lot but spreads managed to squeeze amid the better tone for risk assets which left the iBoxx IG cash index at B+125bp (-0.5bp), and the AT1 index at B+625bp (-13bp) which is at the tightest level since early June. In high yield, the squeeze took the index to B+467bp (-3bp in the session).

We closed with iTraxx Main at 53.7bp (-1.3p) and X-Over at 325.7bp (-6.6bp), with the ratio between a little lower at 6.06x.

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.