24th November 2020

🎈 Markets lift off again

iTraxx Main

48.6bp, -2.5bp

iTraxx X-Over

264.3bp, -11bp

🇩🇪 10 Yr Bund

-0.57%, +1bp

iBoxx Corp IG

B+104bp, -2bp

iBoxx Corp HY

B+379bp, -9bp

🇺🇸 10 Yr US T-Bond

0.88%, +2bp

🇬🇧 FTSE 100

6,432, +98

🇩🇪 DAX

13,292, +165

🇺🇸 S&P 500

3,633, +56

It’s the moon next…

Judging by the level of market activity, a fear of missing out has returned and must be the dynamic driving the rally. The US Thanksgiving break has just about arrived and it has seen investors pile in ahead of it. We’re not going to see much after Wednesday’s session, with normal business resuming some time next week. S&P is soon to be having a look at 3,700 again, the Dow is up through 30,000 for the first time ever and the Dax is back in the black for the year. Bitcoin is a hair’s breadth from its own record high.

There is a clear bias in the risk pricing dynamic to the upside although one could argue that the big, exciting moves higher ought to be harder to come by – perhaps needing something out of the ordinary to help. Trump finally conceding office isn’t one of them, although US political certainty will help at the margin.

Markets had even been selling the vaccine development news. However, it’s not necessarily the case that we are desperate for another catalyst (positive event) to help improve the market’s fortunes from these heady levels. An incremental grind will do.

It’s a result that IG spreads (iBoxx index) are just about flat for the year. Macro had/has collapsed and we have a crisis with an uncertain ending. But copious levels of liquidity have needed a home. Equities, especially in the US (and Asia) have recovered smartly and other asset bubbles look like they might be emerging. The Dax has managed to claw itself back into the black for the year as well, just.

The hunt for yield has bolstered the corporate bond market, which has maintained investors’ confidence given the low level of defaults – with expectations of the where the default rate might peak likely to be pared back.

The other obvious beneficiary has been crypto. Reasons are now being found to justify Bitcoin’s incredible exponential rise of late (scarcity, replacement eventually for Gold etc, Paypal’s participation affording out credibility). In a low yield world, alternative investments make their case as always, where Bitcoin values of $100k – $300k become more difficult to argue against.

In the real world, equities are enjoying some upside ahead of the long break and while the Dax, for example, is back in the black, the S&P recovering to be higher a considerable 12% year to date – and now less than 2% away from our year-end 3,700 target.

EU’s exercise in window dressing

Primary was busy kicking off with the European Union taking the latest instalment of its so-called SURE social bond funds, this time for €8.5bn in a 15-year maturity at midswaps-2bp and interest pitched up at €90bn. Of course, most of the allocations went to central banks, with regular (institutional) investors amongst those frustrated and fighting for scraps.

In the corporate world, the most interesting deal probably came from courtesy of Lufthansa, the beleaguered, bailed-out German-based, national champion carrier issuing €1bn in a long 5-year to yield 3.125%. The huge €4.25bn of demand saw pricing 62.5bp inside the initial guidance.

There’s been a bounce in sentiment coming from hopes that the vaccine discoveries will allow activity to resume some sort of normality soon. These types of borrowers (mostly high yield rated) will continue to take advantage. High yield market issuance is now up at a record €81.1bn, year to date. That’s around €3bn more than last year and is heading for €85bn+.

The other non-financial corporate offering came from CNH, the borrower taking €750m in a long 3-year at midswaps+53bp (-32bp versus IPT, books €3.1bn).

Clearstream Banking issued €350m in a no-grow senior preferred deal at midswaps+36bp (-29bp versus IPT) on books of €4.1bn. Romania issued €2.5bn in 9-year (€1bn) and 20-year (€1.5bn) transaction costing midswaps+175bp and 2.65%, respectively. And the Ivory Coast issued €1bn of a long 12-year to yield 5% (-50bp versus IPT).

Better late than never

Catalysts or not, it was an excellent session for risk markets. There wasn’t much to inspire, if truth be told. As highlighted above, the S&P added 1.5% as at the European close and the Dow rose through the 30,000 mark for the first time in its history. Old school stocks are certainly coming into favour into the next leg of the expected recovery.

The FTSE gained another 1.5% as well and the Dax closed back in the black for the year, up 1.3% on Tuesday. The FTSE is up by over 15% this month alone – although it has been the biggest underperformer of all the major markets – and is still well in deficit year to date.

Credit was in the thick of it. The cost to insure credit dropped, with Main 2.5bp lower at 48.6bp and X-Over at 264.3 (-11bp) with the ratio declining to 5.4x as high/low beta compression feeds into the bullish tone.

The cash market was focused on the primary sector, but the positive tone led to a continuation of the squeeze in spreads and the iBoxx IG index was FINALLY back to flat for the year at B+104bp! The tea leaves are aligned for a continuation of the trend and, against all expectations, we’re likely going through the B+100bp again.

We saw that same squeeze work in the high yield (all higher beta) market, and the index tightened to B+379bp (-9bp) where these relatively euphoric moments might well – likely will – take us to tighter for the year as well, by the time 2020 is out. There’s only 34bp to go, after all.

A word on sterling, the IG corporate bond index is now 7bp tighter for the year at G+130bp and total returns are at 6.5% so far in 2020.

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.