30th March 2020

🗞️ Corporate bonds: Help needed for the little guy

iTraxx Main

98.1bp, +4.2bp

iTraxx X-Over

580.5bp, +4.3bp

🇩🇪 10 Yr Bund

-0.53%, -5bp

iBoxx Corp IG

B+255.4bp, +1bp

iBoxx Corp HY

B+806bp, +12bp

🇺🇸 10 Yr US T-Bond

0.66%, -9bp

🇬🇧 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″]

Good riddance to Q1, but will Q2 offer hope?

The first day of calm after 3 weeks. It doesn’t feel right. The S&P didn’t hit limit up/down and EM bonds were not moving in a 5/10 point range.

The enemy has been at the gates, though. Fund managers have been propped up against the door, stopping investors from breaking it down and getting their cash out from the various investment funds. That door is always too narrow when everybody wants to exit.

The ECB might have widened the door for the investment grade markets, but the orphaned markets are left to fend for themselves. For instance, the primary market is open, but well-known, large, hitherto solid, well-rated corporates are the only ones that can print – and for that, they are paying up.

Performance-wise, we are sitting on total returns (iBoxx) in IG credit of -6.1%, AT1 -18.3%, HY -15.9% and IG sterling of -6.0% for the year to date. Hard to imagine that it’s actually been worse. Last week’s huge rally in risk assets following the launch of those stimulus programmes – and now a rally in the underlying – has saved the day!

The quarter’s performance across most risk asset classes is nothing short of awful. It’s as bad as we can care to imagine. Volatility is massive and we are living through some of the wildest intraday/daily swings in valuations. Whatever they are today, we could be adding to or subtracting materially from the year to date performance for month/quarter-end, in tomorrow’s final session.

Unfortunately, there are rising concerns that the US, lacking any real leadership or a coherent, well-organised Federal response (no surprise given the form of the current administration), might just see a second big leg lower in markets – as the death toll mounts.

Primary showing no let-up in the pace

So, as suggested, the credit primary market has been weathering the storm of late – operational through it, and once again churning out another impressive array of deals. It’s been a fantastic week and actually shows little sign of letting up. Investor demand remains excellent, even if many are seeing some significant outflows.

First out of the blocks was AB InBev, with the triple-B rated borrower taking €1bn in along 7-year at midswaps+230bp, €1.75bn in a 12-year at midswaps+285bp and a further €1.75bn at midswaps+20-year at midswaps+355bp. The interest for the €4.5bn total offering was a combined, huge €19.25bn with final pricing 20-35bp tighter versus the initial talk across the tranches.

ThermoFisher followed with a dual-tranche €1.2bn effort split equally between 7-year maturity priced at midswaps+205bp (-40bp versus IPT) and a 12-year at midswaps+245bp (also -40bp versus IPT). The 40bp tightening was made possible given the size of the books, which were up at a combined €11.2bn+.

They were the day’s ‘more fancied’ deals. Not particularly frequent borrowers and they fit the earlier description of where the demand is. Because also in the market was Volkswagen. They are one the euro-denominated debt markets biggest borrowers and have been much maligned by the various (diesel) scandals over the past couple of years.

Volkswagen paid up handsomely. They issued €650m in a 3-year at midswaps+290bp (-25bp versus IPT), €700m in a 5-year at midswaps+335bp (-25bp versus IPT) and €800m at midswaps+360bp (-30bp versus IPT). Demand only came in at €5.3bn across the various tranches.

That was it. We had nothing in financials. So, the total for the month – with a session still to go, comes in at €38.1bn for IG non-financials issuance – and we’re back on track. In fact, we are ahead of last year’s opening quarter by around €4bn – and it was a record year (€318bn). Surely not the case for 2020.

Calm, finally

We had another decent crunch lower in government bond yields as a strong bid for duration came on the back of the huge global slowdown expectations after a ratchet lower in oil prices. And, for those oil prices, there seems no bottom at the moment as desperation mounts for oil producing nations, WTI was at $20 per barrel again.

No surprise that business sentiment (94.5 versus 103) across the Eurozone declined with services, industrial and consumer sentiment/confidence all savaged. There’s a lot more of that to come in this data-heavy week.

The equity markets in Europe were pulled higher after some earlier weakness, as the US markets opened in sprightly fashion. The FTSE closed 1% higher, the Dax added almost 2% and, at our close, the US markets were around 2% higher.

In credit, the synthetic space saw protection costs rise largely on the back of the earlier weakness in equities. That left Main and X-over around 4bp higher, left at 98.1bp and 580.5bp, respectively.

The bank dividend/share buyback story from the weekend took hold and we had a bit of weakness in the AT1 market (bank equity too) amid differing opinions as to whether banks will suspend AT1 coupons – and then all the refinancing/valuation implications that might lead to. Prices were 1-4 points lower, the index higher B+1,173bp (+100bp).

The IG market closed flattish, with the iBoxx index at B+255.4bp (+1bp). We also had the weekly update from the ECB, reporting that its holdings of IG non-financial corporate debt rose to €201,450m after lifting €1,285m of securities last week, which was down on the €2bn from the previous week.

The high yield market, probably left high and dry, is performing admirably – relatively, of course. It hasn’t quite fallen off its perch as it did in 2009 and threatened to do in 2012, but there are going to be some testing times ahead if the macro weakness persists. Those testing times are probably yet to come. Anyway, we closed the session weaker, the index 12bp wider at B+806bp.

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.