27th May 2020

🏥 Markets defy gravity, again

iTraxx Main

71.6bp, -1.6bp

iTraxx X-Over

431.3bp, -13bp

🇩🇪 10 Yr Bund

-0.42%, +1bp

iBoxx Corp IG

B+178bp, -8bp

iBoxx Corp HY

B+588bp, -26bp

🇺🇸 10 Yr US T-Bond

0.67%, -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″]

Bullish mood persists…

The markets are determined to finish the month with a flourish, whilst attempting to recover much of the lost ground at the same time. There are bullish times as we seek to recover from the devastation wreaked by the Covid-19 global economic lockdown. If those vaccines, recovery medicines like Remdesivir and antigen tests are filled out en masse then we are looking at more risk asset pricing upside through June.

A good bid for equities as they look beyond the current data and into Q3/4 is likely. (Headline) event risk is the derailing factor – Hong Kong, for example. Rates might tread water in a narrow trading range grappling with masses of supply, any deflationary forces and central bank buying programmes. Credit spreads will go tighter and if the default outlook doesn’t come in as bad as currently projected – which is more than likely, then the high/low beta compression trade is back.

There’s a definite sigh of relief for the high yield investor. First, spreads never gapped to levels seen in the previous crisis, back in 2008. Forced selling might have occurred, we admit, but nowhere near as bad as feared. In fact, for choice, the poor levels of liquidity in secondary will boost spreads in the sector more than in IG.

High yield primary shut as we might have expected (for 6 weeks!), but the €4.5bn of deal flow in May is a good sign that investors have become more comfortable about their investments as this market has matured. We don’t expect the sluice gates to open any time soon, but a steady flow of deals could be anticipated as we get back to some kind of normality.

It’s hard to imagine now, but the issuance run rate (pre-COVID19) had set a record pace before the abrupt ending of it at the tail-end of February. We’re now up at a little over €27.5bn for the year to date, and anything approaching €60bn of issuance for the full-year would be a good result.

Busy mid-week primary

April was the best month on record for the IG non-financial primary market with supply up at €57bn. We now have two sessions left in May and we are up at €52bn. The record might be a session or so too far, but the two months combined have been the best ever for the Eurobond market. We have BASF due on Thursday with a possible dual-tranche deal.

So Scania kicked us off with €500m in a 5-year priced at midswaps+260bp, against an initial price talk of midswaps+290bp with final books just a shade under €2bn.

However, Siemens trumped them with a three-tranche €3.5bn euro offering with a sterling tranche thrown in as well. They issued €1.5bn in a 2-year at midswaps+50bp (-35bp versus IPT), €1bn in a 4-year at midswaps+58bp (-37bp versus IPT) and €1bn in a 6-year at midswaps+62bp (-38bp versus IPT). The combined interest for the deals was up at a massive €17.4bn. The £450m was priced at G+100bp in a 3-year maturity, with books of £1.65bn and final pricing 30bp inside the initial talk.

Staying in sterling, United Utilities lifted £300m in a 22-year at G+135bp (-15bp versus IPT), with books under £1bn.

The high yield sector had Swiss group Firmenich’s hybrid deal. The borrower had previously issued €1.5bn in a dual-tranche offering (rated IG). This time, the BB+ rated offering for €750m printed at a yield of 3.875%, with interest for the deal at over €3.25bn and final pricing 62.5bp inside the opening talk.

In senior banks, BBVA issued €1bn in a 5-year senior preferred social COVID-19 issue at midswaps+112bp. The final pricing was 33bp inside the initial guidance and books were just short of €4.8bn for the deal.

There was a host of deals elsewhere, satisfying most areas of the markets. We had Swiss Re Finance UK issue €800m in a 32NC12 subordinated note priced at midswaps+275bp (-50bp versus IPT, books of €7.5bn). Aviva issued £500m of  35NC15 Tier 2 note at G+370bp (-30bp versus IPT, books £3.5bn).

Sovereigns were active. Iceland took €500m at midswaps+90bp in a 6-year offering (-30bp versus IPT), off books at €2.7bn. The headlines in the sovereign space though would have gone to the €7bn deal from France, the 20-year priced at OATs+6bp.

Markets hang on as Trump rages against social media

The news that the ECB’s Lagarde warned that GDP would shrink between 8% – 12% (that is, twice as bad versus 2008) for the region barely made an impact on the market. There’s probably nothing new in it although markets will closely peruse the official ECB forecasts due next week.

Of greater interest was the EU’s €750bn of intended borrowing proposal for its virus recovery programme (€500bn in grants, €250bn in loans to members). They’re going to need to get this unanimously agreed by the 27, in the face of several dissenting nations.

Meanwhile, the Japanese were busy agreeing a $1.1trn budget stimulus package (6% of GDP) as it seeks to inject life into the beleaguered economy with is heading for another recession. Later into the day, Mike Pompeo confirmed that the US was no longer viewing Hong Kong as autonomous from China. The repercussions of this will be felt across the region as a start, very soon.

Anyway, it was all going well before the US markets opened and Trump suggested social media sanctions after being fact-checked warned by Twitter on his posts. Equities wobbled but the FTSE still managed gains of 1.3%, the Dax impressively added another 1.3% as well and at the European close, the S&P had clawed its way back to flat. As at the time of writing, the S&P was 0.8% higher.

Rates didn’t do too much and moved in mixed fashion across the markets, leaving the 10-year Gilt to yield 0.19% (-3bp), the Bund -0.42% (+1bp) and the Treasury 0.67% (-3bp).

The potential for high/low beta compression we suggested above was evidenced again in the credit protection markets. iTraxx Main moved 1.6bp tighter to 71.6bp and X-Over moved 13bp lower to 431.4bp with the ratio between the two declining a touch further.

In cash, there wasn’t much by way of flow and volume in secondary, but we had another session leaving the Street to tighten up the market. In fact, we are in squeeze territory. That left the iBoxx IG cash index at B+178bp – another 8bp tighter in the session, or, in just three sessions, reflecting 15bp of tightening.

The AT1 index tightened by 56bp to B+742bp and is now at the lowest since mid March and more than 50% tighter than the virus panic peak wide. And finally, the high yield market followed a similar trend. The index was 26bp tighter at B+588bp – some 47bp tighter this week already.

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.