1st September 2020

🗞️ Kicking off with a bit of style

iTraxx Main

52.1bp, -2.1bp

iTraxx X-Over

311.8bp, -9bp

🇩🇪 10 Yr Bund

-0.41%, -1bp

iBoxx Corp IG

B+124.2bp, unchanged

iBoxx Corp HY

B+420bp, unchanged

🇺🇸 10 Yr US T-Bond

0.72%, +3bp

🇬🇧 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″]

Feed the fish…

The marker has been put down as a flurry of deals got us off to a firm start for the month. Getting back to normal (schools and work in the office are the ultimate targets) means that we are also anticipating a bullish month – perhaps period, for risk assets. That 3,700 for the S&P is still a reachable target although we’re going to need the tea leaves well-aligned.

If we are right, that directional trend boosts credit – we will see record annual levels of primary in investment grade and high yield credit. Spreads will recover in IG and AT1 markets more than in plain vanilla high yield, although the latter will see them squeeze tighter. Just how much will depend on the corporate news flow as government support schemes are withdrawn.

Already we are seeing the low rates ‘forever’ regime produce a narrative that equities and other ‘higher yielding’ assets are the places to be invested. The excess systemic (investor) levels of liquidity are going to be chasing those higher yields (corporate bonds) and capital growth (equities and corporate bonds).

If this day’s deals were a harbinger of things to come from a demand perspective (Adidas offering 9.5x subscribed), then borrowers will be in the market aplenty. Admittedly, Adidas is not such a frequent borrower, has name appeal and being first out of the blocks would have been an added bonus for them.

Still, it’s great for borrowers. The market is very strong. The demand is clearly there. And it looks as if it will be with us for a while judging by some of the day’s macro data (CPI especially) suggesting further ECB action (more bond buying ahead as a minimum).

Adidas races ahead

A rare visit from Adidas and the Enel hybrid were probably the highlights of the session. We did have the high yield market open its account with French borrower Orano, while Mediobanca popped up for the senior financials market.

Schipol Airport was the other euro-denominated corporate bond borrower in the market, while BMW kicked off the post-holiday sterling market’s corporate borrowing issuance.

Off a book of €5.5bn, Adidas issued a 4-year, €500m at midswaps+33bp, which was also 32bp inside the initial guidance. They followed up with a €500m, 15-year deal at midswaps+30bp, which was 30bp inside the initial talk, with books for this offering up at €4.6bn.

Royal Schipol went for a dual-tranche as well, issuing €500m of a 12-year green bond priced at midswaps+100bp, which was 40bp inside the initial talk and books for the tranche at €2.6bn. The 7-year tranche was for €700m at midswaps+75bp, with books at €4bn helping pricing tighten by 35bp versus the initial mumble.

Enel’s €600m PNC6.5-year hybrid was almost 6x covered and priced to yield 2.375% versus initial indication which went out at 2.875%. It was the eighth non-financial corporate hybrid deal in a week. Rounding off the IG non-financial issuance in the session, BMW issued £350m of a 3.5-year at G+85bp, which was 15bp inside the opening talk, with books at £600m.

Even France’s Orano saw interest of €2.4bn for its BB+ rated €500m, 7.5-year deal which was eventually priced at midswaps+315bp, some 45bp inside the opening indication.

Mediobanca issued its 7-year senior preferred €500m no-grow green bond 30bp inside the initial talk, at midswaps+135bp with books at an impressive €3.5bn. Finally, Erste Bank issued a T2 €500m 11NC6 at midswaps+210bp, which was 35bp inside the initial chatter, also managing solid investor interests of €3.4bn for their troubles.

Mixed fortunes

At the open, the Dax, in particular, took the bull by the horns while sterling strength/dollar weakness ($1.34 now) weighed heavily on the FTSE. The Dax subsequently lost some steam as its manufacturing PMI (52.2) for August fell short of expectations, while in France the same indicator was at 49.8 (49 expected). At least German unemployment declined for the second consecutive month.

However, in an ominous sign that further ECB action is very likely during Q4, Eurozone inflation dipped into negative territory in August (to -0.2% from 0.4% in July). The core rate fell as well to just 0.4% YoY from 1.2% previously, suggesting deflationary effects of the crisis are possibly taking a greater hold.

The UK’s data stream in the session was better with the manufacturing PMI showing a good acceleration in the sector (55.2) through August (albeit off a low base), while consumer credit rose £1.2bn versus expectation of £0.67bn. In the US, the ISM Manufacturing survey pointed to a solid recovery as well, up at 56.5 and easily ahead of the 54.5 expected.

The inflation data didn’t have a huge impact on rates. The benchmark 10-year yield for the Bund was at -0.41% (-1bp), the Gilt yield at 0.30% (unchanged) while the US Treasury yield was at 0.68% (-1bp), as at the time of writing.

The FTSE took a big tumble and went against the grain seen elsewhere. The currency markets are at lay and that sterling strength saw the index decline by 1.7%, although the Dax endured a volatile session in a +/-0.75% range and only just hanging on to nudge higher at the close of play. At the time of writing, the S&P was 0.5% higher and busy setting fresh intraday record highs.

In the credit market away from primary, we saw the cost to protect credit decline by 2.1bp in iTraxx Main to 52.1bp while the X-Over contract was 9bp lower at 311.8bp.

As for the cash market, the focus was on primary, but the broader improved tone barely helped secondary spreads squeeze. The IG iBoxx cash index was at B+124.2bp (-0.2bp) at the close, and the AT1 index edged to B+609bp (-5bp) – the tightest level for the CoCo index since early June.

The sterling IG market likewise was better bid for choice and the index at B+152bp (-0.2bp) and again that is the tightest level since the first week of March. Finally, in high yield, we closed unchanged with the index at B+420bp.

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.