7th January 2021

💶 Money Talks

iTraxx Main

47.6bp, +0.2bp

iTraxx X-Over

247.8bp, +1.4bp

🇩🇪 10 Yr Bund

-0.56%, unchanged

iBoxx Corp IG

B+97bp (-1.5bp)

iBoxx Corp HY

B+345.4bp (-5bp)

🇺🇸 10 Yr US T-Bond

1.07%, +3bp

🇬🇧 FTSE 100

6857, +15

🇩🇪 DAX

13968, +76

🇺🇸 S&P 500

3801, +54

And it CAN sing and dance and it CAN walk…

The liquidity-fuelled markets are on fire. Not even the siege at the US Capitol building could derail markets. Investors have their all on a Biden administration stimulus package anticipated to propel US growth into a fresh orbit over the next couple of years. We’re even making excuses for there to be no rowing back of Trump’s previous tax cuts/breaks. This market wants to rally. There will be a pull back, and it might even be more than a bump in the road, but the path of least resistance is mapped out.

The headlines are all about the disgraceful scenes in Washington DC and the certification of Biden as the next US president. But the impact of the former, rightly, has been nil to very small on markets.

The deployment of the vaccine in the US is accelerating. They could be heading to warp speed growth, to coin a phrase, come Q2. That will drag other economies higher as well, where the UK has the most potential given its own vaccine deployment trajectory, while the Eurozone will likely lag a quarter or two. The basic message is the same: this party is getting into full swing.

Even Bitcoin is racing higher, setting records on a daily basis (now at $39k a coin and rising). If the current momentum in price moves can be maintained, then a greater number of (larger) asset managers will be forced to gain some exposure to the product. Tech is driving transformational change and product evolution at a rapid pace. There is every reason to think that cryptocurrency can work (as a store of value at least).

So, as markets front-run the upcoming stimulus package, equities are going higher. Credit markets should see brisk primary activity through Q1, and tighter secondary spreads which will quite possibly take us close to record tights during this opening quarter. Rates will be better offered in the US reflecting the upcoming stimulus/macro recovery there, but we anticipate only the limited potential for more modest weakness in European government bond markets (and higher market rates).

Primary market business resumes

After a midweek break, European primary was business as usual on Thursday. Admittedly, we would think that the opening new year skirmishes in European corporate primary have been fairly lighter than we might have expected given the otherwise bullish nature of the markets.

Bayer AG was the sole IG non-financial corporate borrower, but to soften the blow at the lack of deal flow there were four tranches on offer and some €4bn of bonds printed. The German giant issued €1.2bn of a 4-year at midswaps+50bp, €1bn of an 8-year at midswaps+78bp, another €1bn at midswaps+93bp for a 10.5-year maturity and €800m of a 15-year at midswaps+110bp. Total books for the deal came in at over €11.2bn and final pricings were 25bp -30bp tighter versus the initial guidance across the four tranches.

In sterling, this year’s second non-financial borrower in National Grid lifted £250m in a 12-year at G+80bp and £250m in a 20-year at G+15bp. Final books were a combined £1.4bn and final pricings 15bp inside the opening talk.

In senior financials, KBC issued €750m in an 8NC7 structure priced at midswaps+60bp (-20bp versus IPT). Abanca issued €375m of a PNC5.5 AT1 transaction priced to yield 6%

In the high yield market, the sector’s account for the year opened with Adler Group’s dual-tranche deal. The real estate group saw almost €5bn of interest for the deals and issued €700m of a 5-year to yield 2.125% and €800m in an 8-year to yield 2.25% (-50bp – 75bp inside the initial guidance). Staying in the sector, triple-B rated Heimstaden Bostad issued €500m of a 2NC1 floater at Euribor+55bp.

Some more please, sir

The Eurozone was affected by a fifth consecutive month of deflation as CPI came in at -0.3% year-on-year again in December, versus expectations of -0.2%.  Right now the markets won’t be reading too much into it, given the impact of the pandemic and subsequent various lockdowns. Retail sales in November were down by over 6% month-on-month, all suggesting a slower recovery in the region versus other geographies.

In the US, the ISM non-manufacturing PMI came in a strong 57.2 for December versus 54.6 expectations and 55.9 in November. US equity markets were busy adding 1.3% or more (at the time of writing), European equities were up around 0.8% but the FTSE this time was trailing – just marginally higher.

All of the US indices saw record intraday highs. The S&P index rose above 3,800, the Dow went up past 31,100 and the Nasdaq through 13,000. In Europe, the Dax saw 14,000 for the first time in its history. The FTSE still needs to rise by over 10% to get to its previous record level – highlighting the huge underperformance of the UK stock market in 2020.

Rates continued to give ground, and yields moved higher again. The 10-year Treasury was yielding 1.07% (+3bp) at the time of writing, the Gilt 0.28% (+3bp) but Eurozone government bonds weren’t doing too much, the Bund yield unchanged at -0.56% in the 10-year.

In credit, we sense some frustration. Investors need more deals. Secondary is too rich and getting richer as spreads tighten into a scarcity of bonds on offer. There’s little selling into this strength in a market beset with poor levels of liquidity. Record tight spread levels are coming.

So the cash market moved tighter into the continued squeezy dynamic of the market.

That left the iBoxx IG cash index at B+97bp (-1.5bp) and outperforming the AT1 index at B+437.5bp (-3bp). The HY index moved tighter as well, left at B+345.4bp (-5bp).

Credit index was mostly unchanged with iTraxx Main at 47.8bp and X-Over 1.4bp higher at 247.8bp.

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.