20th September 2020

🗞️ Market technicals favour corporate credit

iTraxx Main

55.5bp, +0.7bp

iTraxx X-Over

298.6bp, +1.6bp

🇩🇪 10 Yr Bund

-0.49%, unchanged

iBoxx Corp IG

B+122.5bp, -0.75bp

iBoxx Corp HY

B+449bp, unchanged

🇺🇸 10 Yr US T-Bond

0.70%, +1.5bp

🇬🇧 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″]

Edgy markets…

Why does it feel as if we are always on a precipice? Despite the recent pullback, the headline risks point to the tech-rally still having been overplayed and likely going to see markets correct some more/bust even, as they did during the dot.com bubble. And then there’s the pandemic, the vaccine (hopefully around the corner) and how we might manage to get through the autumn/winter months with or without an effective one. Of course, excess market liquidity is propping everything up, so valuations surely can’t be justified? The point is, that liquidity can keep everything supported for a good while yet.

In credit, it’s all about primary. Secondary credit markets are dull. Spreads are moving in a very tight range and we haven’t seen much of any bias yet in terms of establishing a firm direction. We think that they want to go tighter, but it won’t happen unless in a meaningful way until we see some more steel in equity markets. Hence, that precipice.

IG spreads (iBoxx index) have been stuck in a narrow B+122bp – B+125bp corridor for a month. In the same period, the HY index has been trading in a B+445bp – 456bp range, while the AT1 has been in a B+595bp – B+615bp.

As for primary, we’ve had a good month. We would say that the deals of late, for corporate credit investors, have seen too much by way of covered bond issuance. The HY market has a big pipeline and will flourish, but that IG one has become a little harder to read.

Admittedly we have had an excellent €29.3bn issued this month, but it seems as if we could have absorbed a lot more. If the current run rate continues, we ought to be looking at upwards of €40bn issued this month (€49bn last September) – which, by the way, would most likely see the year set a fresh record of issuance ion the IG euro-denominated non-financial corporate bond market.

We are now just €12bn short of the record set last year (€318bn) and it is very likely going to be this month’s business in getting the record out of the way. Last week we saw over €10bn issued which was a relatively quiet one given our expectations, but that might have something to do with a bit of disruption around the FOMC.

Wait and see

Last week’s macro centred really on the Fed and because they didn’t feed the markets with dovish action/words, there was much disappointment, hence the equity market weakness. Policy is on hold and it seems to be a case of ‘wait and see’, later corroborated by the BoE’s stance following their MPC meeting.

We do seem to be at yet another inflexion point, and while many of us are focusing on the coronavirus second wave, there are rumblings on the trade/geopolitical front. Over the weekend, China issued a proposed list of rules of unreliable entities in response to the increased hostilities with the US on trade. No names were released as of yet, but the outcome of the TikTok situation will soon be followed with a more definite reaction.

There doesn’t seem to be much of light at the end of the tunnel anywhere. That China-US rift, Brexit, the pandemic and so on. Equities are looking directionless, too, as the FTSE closed 0.7% lower on Friday, The Dax lost the same while the S&P saw a decline of 1.1%. Rates were unchanged with the 10-year Gilt yield at 0.18%, the Bund yielding -0.49% and the US Treasury 0.70% (+2bp).

In credit, Friday’s primary activity saw Terna unopposed with €500m of a 10-year at midswaps+65bp. The book was just 3x covered and final pricing was the now obligatory 25bp tighter versus IPT.

IG secondary credit edged tighter despite weaker equities and moves to their tightest levels since February as measured by the IG iBoxx index, at B+122.5bp (-0.75bp on Friday). The lack of activity or just resolute markets – or both, saw HY unchanged with the index at B+449bp, with a modest 3bp of index tightening in the AT1 sector (to B+607bp).

Credit index was barely moved, better offered for choice (wider) with Main at 55.5bp (+0.7bp) and X-Over at 298.6bp (+1.6bp).

After the close of business last week, S&P changed the outlook on Spain’s single-A rating to negative from stable -citing the hit taken from the pandemic with the fiscal deficit to rise to 12% of GDP in 2020. As for this week, we look forward to manufacturing and services PMIs across the Eurozone and the UK amid fears that the mixed picture for August will show the Euro region running out of steam. For the UK, the picture ought to be brighter (improved housing market and ‘eat out to help out’ scheme).

There’s also the big EU summit where a broad range of discussions (China, Turkey, digital markets etc) will now include the Brexit trade situation. Elsewhere, The UK will still be embroiled with the Internal Market Bill, while in the US, there is going to be much noise about the appointing (or not) of the next Supreme Court judge.

So, there is enough on our plate to have to contend with but, in credit, look for a grind better in spreads and hopefully a slightly more buoyant new issue market.

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.