16th November 2020

💪 Markets get another shot in the arm

iTraxx Main

49.8bp, -2.4bp

iTraxx X-Over

285.0bp, -12.8bp

🇩🇪 10 Yr Bund

-0.55%, unchanged

iBoxx Corp IG

B+107bp, -1.6bp

iBoxx Corp HY

B+402bp, -10bp

🇺🇸 10 Yr US T-Bond

0.90%, unchanged

🇬🇧 FTSE 100

6,419, +103

🇩🇪 DAX

13,145, +68

🇺🇸 S&P 500

3,622, +37

The only way is up…

It used to be that case that easier policy elicited euphoria in risk markets. Now it’s drugs. We were already feeding off the positive close last week in the US and weekend news that Trump might be softening his stance about his leaving office. But then the big drugs news from Moderna which suggested that its vaccine demonstrated greater efficacy than the BioNTech/Pfizer one – and appears more flexible (lower storage temp and longevity once thawed) gave risk markets a jolt.

The Asian markets were gung-ho themselves, anyway, playing into the upbeat Chinese data (retail sales) but also boosted further by the historic pan-Asia, 15-country free trade-pact which was agreed over the weekend. What’s not to like?

Add in that the second virus wave is probably peaking across Europe and we have a fresh impetus for markets to rise ahead of the US Thanksgiving break, which is coming at the end of next week. With the third-quarter earnings season reporting coming to a close and blackout periods ending, we had a few more corporate borrowers in the market as well.

That’s not to suggest that we are heading for a busy few sessions ahead. We might be, but so much funding has been lifted already this year that we should not expect a mammoth flurry of activity into year-end. The investor demand would be there, but we are likely just going to tick over.

It’s worth a mention that the record IG non-financial issuance this year (€345bn, last year €318bn) has now been added to from the HY market. That is, Renault’s deal in the session added €1bn to the HY volume total for the year. That took that sector’s issuance to a record annual total of €76.9bn (€76.4bn in 2020). We think €80bn+ for the full-year is now possible.

Here’s how that HY record issuance came about:

That level of high yield issuance is some feat and against expectations. After all, global macro has been sledge-hammered, we’re likely calling a Eurozone in recession for Q4 but the default rate is still relatively low (only expected to peak at below 7% in this cycle). Yet we have record issuance in the HY market – with 4 weeks of business to go before year-end.

And, before we forget, total returns haven’t been too shabby, just -0.4% year to date. That’s the power of intervention and market manipulation (by the central banks). And now, investors will be playing into the high/low beta compression trade!

Primary chugs along

There was a smattering of corporate deals in the session, but mostly it was SSA issuance and dollar transaction that dominated. In euros, and in IG non-financials, we had TenneT issue an increased €600m in a 12-year maturity at midswaps+32bp (-28bp versus IOT), and a further €750m in a 20-year at midswaps+47bp (-33bp versus IPT), all off combined books in excess of €6.6bn.

In high yield, Renault issued that €1bn in a 5.5-year to yield 2.375% (-37.5bp inside IPT). And in financials, Erste Bank went the AT1 route for €750m priced to yield 4.25% in an NC7.4 structure, while Mediobanca took €250m in a 10NC5 T2 offering at midswaps+280bp which was 60bp inside the initial guidance off a book in excess in €2.2bn.

High on drugs

The upbeat open was added to as that Moderna vaccine news filtered through into the markets. Equities rose significantly, rates were better bid before the news. They then switched to better offered while credit continued its tightening trend and saw another big squeeze in spreads. The markets settled off the highs in equities and ended flattish in rates.

At the close, the FSTE rose by 1.6% and continues to be the near term outperformer in Europe, while the DAX rose by 0.5% and, as at the time of writing, US stocks were up to 1.5% higher with the Dow out in front.

Oil prices rose by over 3%, Bitcoin continued its own month long ascent and is now up at €14,150 per coin.

Credit index tightened and protection costs declined with iTrax Main now at 49.8bp (-2.4bp) and X-Over some 12.8bp lower at 285bp with signs of compression now emerging between these indices. It’s also probably the best way (easiest) way to play that trade.

In cash, there was one focus on primary and there is much more room for investors to take deals down. Nevertheless, the mood music is good and the Street is tightening up the market as low levels of inventory begin to bite some more (for those wanting to chat the market anyway).

The IG iBoxx cash index spread tightened by 1.6bp to B+107bp and the index is now just 3bp wider than where we started the year (-150bp versus pandemic wides). The AT1 index tightened by 23bp in the session to B+540bp, and the sterling corporate market was 2.5bp tighter at G+138.5bp – flat year to date.

Sterling credit is up 5.4% this year so far in total returns. The AT1 has staged a great recovery to deliver 2.2% YTD. And remarkably, the euro-denominated IG market is up 2.3% in total return terms so far this year.

And then there is the high yield market. Spreads on the index were 10bp tighter and now at B+402bp which leaves it just 57bp wider than where it started the year! And total returns are now zero for 2020 so far. This index was down 20% in total return terms 6 months ago.

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.