10th January 2021

👨‍⚕️ Men in white coats, please

iTraxx Main

47.6bp, unchanged

iTraxx X-Over

246.0bp, -1.8bp

🇩🇪 10 Yr Bund

-0.53%, -1bp

iBoxx Corp IG

B+96.4bp, -0.7bp

iBoxx Corp HY

B+342.5bp, -3bp

🇺🇸 10 Yr US T-Bond

1.10%, +3bp

🇬🇧 FTSE 100

6873, +16

🇩🇪 DAX

14,049, +81

🇺🇸 S&P 500

6824, +21

Biden’s inauguration can’t come soon enough…

It surely can’t be as exciting this week. However, risk markets will possibly continue their rally. We are unlikely going to see the big moves of last week as the US stimulus euphoria most likely fades some. The opening rally was about getting ahead of the curve of the announcements due after the Jan 20 US Presidential inauguration. We would expect that it’s about taking baby steps higher from here.

Not least because other issues are emerging which might need a little focus. That is, US political chaos and intrigue. We’re likely going to see a bit of volatility, but the impeachment moves against Trump ought not to cause too much angst in the markets.

The general push higher in equities from now will nevertheless likely lead to a disproportionate tightening in credit spreads as poor secondary market liquidity elicits a good old fashioned squeeze in spreads. We’ve seen a bit of that, but with few chasing the market and waiting for primary, the tightening should accelerate through Q1.

Last week, not even Friday’s weak payroll report could derail the upward trajectory in risk markets. The US economy shed 140k jobs, the first such loss of jobs since April last year. The unemployment rate was unchanged at 6.7% and average hourly earnings rose by 0.8% in December versus 0.2% expectations.

Investment grade spreads have tightened by 4.5bp so far (iBoxx index) in the opening week of 2021. We’ve had almost 20bp of spread tightening in the AT1 index, barely 3bp in the sterling index and 16bp of tightening in the high yield index. Total returns have varied between 0.2% (IG) and 0.5% (HY). Not very exciting when set against the current ‘go to’ asset classes – equities (S&P +2%, FTSE +6%) and Bitcoin (+40%), but a very decent result for credit markets.

Corporate bonds were never meant to be exciting. We buy the debt, clip the coupon, have them redeemed and roll into the next deal. And as suggested, the poorest level of secondary market liquidity – ever – means that relative value pair trades are no longer economic to do. Buy, hold, clip.

US politics and the virus in the headlines

As suggested previously, US politics might unleash some volatility still into the market this week. There are several ways it could come. One of those might emerge from moves of Trump’s declining cabinet and Vice President Pence invoking Amendment 25 (unlikely) to remove the sitting president. More likely it’s the Democrats starting impeachment proceedings. The latter will get through the Congress, but whether the Senate could muster up 2/3 majority is open to question – and perhaps more unlikely. Time is running out.

And what about Trump himself – Does something else emerge from him to stir up his base? Or does he quietly fade into the background?

In credit, the primary market has been difficult to gauge and draw any firm conclusions from after an opening week which probably ought to have seen much more issuance. It’s far too early to judge anything, but after last year’s record near €360bn we should be looking at up to 25% less issuance this year.

The demand for risk was excellent, equities were in top form and confidence is high.  Only four IG non-financial corporates chanced their arm in the week. Admittedly, Bayer issued four tranches for €4bn and VW Leasing €2.5bn in three tranches, but we could reasonably have expected more.

Of the €8.75bn printed, €8bn came from German borrowers (BMW being the other) with France’s Alstom being the non-German issuer.

IG issuance in 2021: Almost entirely from Germany

The deals, as usual, were well-oversubscribed and final pricing 25bp-40bp tighter as a rule of thumb versus the initial guidance.

The only corporate offering on Friday came from Banco de Sabadell, the bank issuing €500m of a 10.25NC5.25 priced midswaps+295bp (-35bp versus IPT, books €1.8bn).

Adler Group opened up the account for the high yield market with €1.5bn issued through a dual-tranche offering with demand close on €5bn for the transactions. There was also significant tightening in the final pricing as the demand showed little signs of letting up anywhere for new deals in credit.

So for this week, the coronavirus situation will dominate, but there will also be some focus on the US political situation and whether Trump can possibly leave quietly (unlikely).

On the data front, in the US we have inflation, retail sales and industrial output numbers. There are Chinese trade and inflation data due. In the UK, we’re light but we do get November monthly GDP data. The Euro area has German GDP for 2020 and Eurozone industrial production for November is due midweek.

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.