9th September 2020

🗞️ Much needed calm after the storm

iTraxx Main

53.3bp, -0.5bp

iTraxx X-Over

312bp, -16.9bp

🇩🇪 10 Yr Bund

-0.46%, +4bp

iBoxx Corp IG

B+125bp, +0.5bp

iBoxx Corp HY

B+452bp, -1bp

🇺🇸 10 Yr US T-Bond

0.70%, +11bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”24″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

Surveying the damage…

Markets finally got some respite and managed to put up a decent rally. There was a tinge of disappointment coming from the news that AstraZeneca had paused phase 3 COVID-19 clinical trials following an adverse reaction in one of the study’s participants. The company’s drug development (with Oxford University) was (and still is) seen as a great hope, but drug trials are often halted.

As it happened, the markets seemed to have taken the news in their stride, perhaps knowing others are also on the coronavirus vaccine case. And so we managed a much-needed recovery ahead of Thursday’s much-anticipated ECB event.

The pause of phase 3 COVID-19 clinical trials

The pause of phase 3 COVID-19 clinical trials did not seem to impact markets significantly

The recent turbulence, though, is most definitely a harbinger of things to come. Broadly, risk asset prices will rise, but they will be met with periods of weakness – which could be ferocious depending on the prevailing events. The US election is still evenly poised in our view (whatever the polls suggest) and might be the deciding factor as to how markets play out through November and December.

It’s gone quiet in the China-US trade front, we’re awaiting the Tik-Tok news, the China-India border dispute is ruffling a few features as is the Turkey-Greece one. Alas, we have the Brexit-trade evolving where the odds have shifted towards there being a hard Brexit and trade between the two sides on WTO terms. Or not.

With scant signs of anything resembling or giving hope to a sustained recovery, central bank policy therefore will be to err on the side of caution. Cutting rates further seems to be a last desperate resort and it looks as if more QE-like measures will be the way forward. That props up safe-havens (keep a lid on rising yields), the excess cash pumped into the system promotes that bid for equities and credit.

Otherwise, the third quarter corporate earnings season is a few weeks away but is unlikely to provide much of a change from Q2’s one, and we likely will have to wait until the Q4 season in early 2021 before we get a better handle on the zombification, or otherwise, of the European high yield corporate base.

There was a decent flow of deals from credit primary as we had anticipated. Credit secondary generally contained to hold firm, but Wednesday’s business might be it for this week although we might get some HY deals priced on Friday.

Primary ticking over

So the deals continued to flow. Erste Group Bank kicked us off, issuing €500m on a senior preferred at midswaps+52bp which was 23bp inside the initial talk off a €1bn book. They were followed with a senior non-preferred from BPCE, as they issued €1.25bn 7NC6 offering at midswaps+100bp (-20bp versus IPT).

In the IG non-financial market, Johnson Controls issued €500m of a 7-year maturity deal at midswaps+80bp, the book of €3.7bn seeing to it that final pricing was 40bp inside the opening talk. A second tranche also for €500m came in a 12-year at midswaps+113bp with books at €2.9bn and final pricing 37bp inside the opening talk.

France HIT followed with €600m of a 9-year at midswaps+200bp (books €3bn and -40bp inside IPT) while Bevco Lux took €500m of a 7-year at midswaps+195bp (-35bp versus IPT, books €2.8bn). Orange SA rounded us off with €500m of a 9-year sustainable issue at midswaps+45bp (-30bp versus IPT off books at €2.9bn).

There was a small, green bond from Norwegian based European Energy which issued €75m in a 1000NC3 hybrid issue a touch tighter than the initial guidance priced to yield 6.125%.

It is clear from the above that the demand for deals is holding up strongly. It is also fair to suggest that the level of deal flow isn’t quite as high as we might have expected, although we have still seen €14.8bn issued this month so far (€292bn year to date – the second-best year on record).

ECB up next

Bereft of any meaningful data and little news on the Brexit trade negotiations front, the FTSE managed to close 1.4% higher while the Dax added back 2%. At the European close, US markets were 2% or more higher across the various indices. There was some recovery also across commodity markets (gold, oil etc).

Rates backed up some too, following the big gains in the previous session. The 10-year Gilt yield rose to 0.24% (+5bp), the Bund yield in the same maturity moved up at -0.46% (+4bp) and the Treasury was yielding 0.70% (+1bp) at our close.

In credit, there was enough in the day’s deal flow to keep investors occupied which meant the usual limited price action in cash. In the synthetic market, iTraxx Main edged 0.5bp lower to 53.3bp but X-Over was almost 17bp lower at 312bp. That compression saw the ratio between the two decline to 5.85x (the lowest for a while yet).

Anyway, in cash the iBoxx IG index closed at B+125bp (+0.5bp), the AT1 index was up at B+622bp (+4bp) with the HY index at B452bp (-1bp). Basically, nothing happening! Over to the ECB.

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.