9th November 2020

🎉 A Vaccine in Sight = Market Euphoria

iTraxx Main

50.3bp, -2.2bp

iTraxx X-Over

293.2bp, -20.3bp

🇩🇪 10 Yr Bund

-0.54%, +8bp

iBoxx Corp IG

B+111bp, -8bp

iBoxx Corp HY

B+415bp, -30bp

🇺🇸 10 Yr US T-Bond

0.96%, +14bp

🇬🇧 FTSE 100

6,185, +275

🇩🇪 DAX

13,101, +621

🇺🇸 S&P 500

3,601, +93

All falling into place for Biden…

Now that’s what we call a rally! Already riding high on the back of the Biden election win at the open, the news later that the Pfizer/BioNTech vaccine was found to be 90% effective saw markets in euphoric form.

The S&P hit a new record high and our 3,700 target at year-end now looks an ultra-conservative one! Rates markets alone were in reverse as credit spreads saw an almighty squeeze. None of that was quite in the script. Still, it’s relief all round. An early present for Biden. Happy Thanksgiving and Merry Christmas and all that.

The dynamics will have altered in the near term as investors get excited about the potential for higher growth, activity and the reflation trade. Specifically, a return to some kind of normality means markets are ending the year on the front foot everywhere and a broad macro recovery means that the widget makers will possibly roar ahead and outperform. Big tech and healthcare are likely going to take a bit of a back seat.

On the election, the markets are probably relieved that there is a result, whatever legal battles may lie ahead. They are also relieved that the Democrats are unlikely going to win the Senate, so the excessive fiscal stimulus (debt splurge) some feared is now unlikely. Relief all round and much of that sidelined cash being put to work.

The Vix volatility indicator is dropping and heading back to pre-pandemic levels (now at around 24%). Those equities are heading for record levels in the US (Trump will take credit) and back to flat for the Dax (YTD), although the FTSE is still 20% lower this year (UK equities face other issues – Brexit being one).

Spread markets are squeezy. Stunningly so! They can be nothing else. Secondary market liquidity is so poor. Any big risk-on period will elicit a disproportionate spread tightening given the dearth of paper around. If, as an example, the S&P heads for 3,700 by year-end, then we will be looking at the IG iBoxx index heading for B+104bp – which is where it started this year. The height of the pandemic saw it in the B+250bp and primary closed.

Since then, IG spreads have recovered but been rangebound for the past 3-4 months at between B+122bp to B+130bp, failing to break higher or lower. We will no doubt now see a push to that tighter spread. As for the primary market, it has told its own story with issue records smashed in IG non-financial corporate sector and about to be in the high yield market.

The deals in the session for corporates took in Erste Bank’s senior preferred issue in an 8NC7 structure for €750m which was priced at midswaps+52bp (-23bp versus IPT, books around €1.8bn). OP Corporate Bank followed up also with a senior preferred in a 7-year maturity for €1bn at midswaps+48bp (-32bp versus IPT, €2bn).

And then we had Deutsche Bank with two senior non-preferred offerings. There was €1.5bn in a 5NC4 priced at midswaps+160bp (-30bp versus IPT) and €1.5bn in a 10NC9 structure priced at midswaps+205bp (-30bp versus IPT). Combined books exceeded €7bn.

FCA Bank was the only IG non-financial corporate in the market, with a 3-year at midswaps+75bp for €850m which was 40bp inside the initial guidance off a book in excess of €5bn.

In the REIT space, Klepierre issued an increased €600m at midswaps+110bp which was 30bp inside the initial guidance off books at over €2bn. High yield rated German REIT Adler Group issued a 6-year €400m to yield 3.00% on books approaching €2bn (and -62.5bp versus IPT). NatWest issued £1bn in an AT1 deal priced to yield 5.125% (-62.5bp versus IPT).

The trend was decent demand but a massive ratchet tighter in spreads/yields versus initial guidance, probably as the whole market looks at a fresh repricing into a materially more bullish tone. The US primary markets were on fire in the session, and might be a harbinger for borrowers in Europe come the rest of this week.

Relief at last

Risk-on such as it was in the session and hopes that macro revival is set up nicely for 2021 means that rates were better offered. Of course, the reflation trade will hammer government bonds, steeper yield curves will boost banks, higher demand expectations will provide a fillip for the beleaguered oil market and improved growth dynamics will be a huge relief for heavy industrial groups.

The high yield market will breathe a sigh a relief as corporate revenues improve. It never saw much angst – not as much as we might have thought given the depressed level of macro activity, but now we should see a good squeeze in spreads.

It’s tempting to think that it is all over for the bull trend in government bond markets. After all, the sell-off saw the 10-year Bund yield rise by 8bp to -0.54% and the Treasury yield in the same maturity to 0.96% (+14bp). Ouch! The BoE has recently put on its buying boots, but the 10-year yield rose to 0.37% (+10bp).

Anyway, amid the euphoria, the FTSE closed off its session highs but still added 4.7% and the Dax 5%. The €Stoxx50 added 6.4%. As at the time of writing, the S&P was 3.2% higher at 3,620 and the Dow had added 4.9% – or over 1,300 points, en route no doubt to 30,000! All these markets were much higher earlier in the session.

In credit, protection cheapened as well we might expect, with the better offered synthetic market seeing iTraxx Main 2.2bp lower at 50.3bp and X-Over dropping 20.3bp to 293.2bp. Look for compression between these indices, up at 5.8x at the moment.

In cash, it was all about the squeeze in spreads. Total return investors won’t be so thrilled but benchmark ones will be grateful. The iBoxx IG index closed at B+111bp (-8bp) and the lowest level since before the crisis and just 7bp wider versus where we started the year. The AT1 index closed 48bp tighter at B+560bp and the tightest level since early March.

And finally, in the high yield market, a massive squeeze with the index some 30bp tighter and left at B+415bp at the close. That’s a massive move and total returns jumped higher, to leave the market returning just -0.6% year to date (that was -2.5% as at the year to end October).

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.