27th January 2020

🗞️ Nervous breakdown

iTraxx Main

46.3bp, +1.7bp

iTraxx X-Over

229.7bp, +11.2bp

🇩🇪 10 Yr Bund

-0.385%, -5.5bp

iBoxx Corp IG

B+104bp, +2.5bp

iBoxx Corp HY

B+363bp, +16bp

🇺🇸 10 Yr US T-Bond

1.61%, -7bp

🇬🇧 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″]

Uncertainty equals weakness…

The coronavirus is possibly heading for epidemic territory. It will be the event which defines where the markets are heading – until such a time that the authorities have it under control.

We were super bullish on risk assets up until the event-risk emerged. Forget 3,500 on the S&P500 and equities elsewhere being pulled higher in its slip stream. We are now looking at there being a significant impact on global growth. Everything else will follow. After all, China Inc. is essentially closed for business.

So with those equities heading lower and likely going to stay depressed for a while, safe-haven rate markets are bid up. And the bid for them might not be as temporary as one thinks. Any news of the virus’ spread coming under control (that might be weeks/months away) is going to give way to working through what the economic impact might be. The assessment will be bleak.

Growth, investment, international trade, confidence will already have been impacted. Of course, the equity (lower) and rate (higher) dynamic is reacting classically, as expected. But what about the corporate bond market?

Primary was still open and we had a few deals in the session. In secondary, activity was light but of course, when equities plummet by 2% or more, there is a defensive bid in the credit market and valuations will come under pressure.

There is not necessarily a huge amount of selling into it. that’s just what we saw in Monday’s session.

We expect investors in the main will sit tight. There will be bigger hits in sectors associated with travel, luxury and mining with autos also likely to feel some weakness. But credit usually acts more slowly because any individual corporate credit worthiness hits take time to filter through. That’s the nature of the beast.

Investors will add through primary and if any glaringly obvious cheap assets emerge in secondary, there will be interest in them too. Protection markets, hitherto not really reacting to macro news flow and equity volatility, will react and better buyers of synthetic credit protection will push the indices higher. Cash therefore should outperform synthetic credit.

Surprisingly, primary subdued still open

Telefonica braved the markets and received relatively good interest for its dual tranche efforts. The Spanish telecoms giant took €1bn in a 10-year at midswaps+68bp which was 22bp inside the opening guidance with books up at €2bn.

And they issued a corporate hybrid for €500m in a PNC7.25 green structure (rated high yield), costing them 2.50%. The book was also up at €2bn and final pricing was 25bp inside the initial guidance.

The other deal came from property investment group Sagax, which issued €300m in a 7-year maturity at midswaps+138bp. Books came in at only €700m at final spread, but that didn’t deter anyone from lopping 22bp off the initial talk!

Markets in reverse gear

In a sense, European markets spent the session playing catch up to the sell-off in the US from last Friday. But additionally, as details emerged of the extent of the coronavirus’ spread, cover ups and disinformation they were adjusting to the headlines.

Fears of weaker economic growth (and reduced Chinese demand) saw oil take an obvious hit, with Brent now down at $58.2 per barrel – some $12 now off the early January high. We also had an Ifo number (German business confidence) which came in at a lower than expected 95.9 for January dashing investor hopes for stability in the domestic economy. It won’t be getting any better soon.

In the bond market, yields plummeted. The 10-year Bund yield dropped to -0.385% (-5.5bp) as the US Treasury in the same maturity fell to 1.61% (-7bp). In the UK, the yield on the 10-year Gilt dropped to 0.50% (-6bp). Italian politics boosted BTPs, with yields on the benchmark 10-year down 18bp to 1.05%. The far-right party of Matteo Salvini failed to win the election Emilia-Romagna.

The FOMC and BoE meetings this week – Wednesday and Thursday, respectively, come a touch too early in terms of possible policy action resulting from the impact we might see on the back of growth from the coronavirus’ spread.

In equities, European stocks declined by over 2% across the board. And FTSE was back to being down (well down) year to date as it declined 2.3%. The Dax was off by 2.7% and now also lower year to date having set record highs during January. As at the time of writing, the US indices were all well-over 1% lower in the session.

The ECB asset purchase programme weekly results showed the ECB in more limited action last, managing to hoover up only €435m of IG corporate bonds (€1.4bn in week previously) with the total haul up at €187,504m.

It could have been worse, iTraxx Main only rose by 1.7bp to 46.3bp while the X-Over index moved 11.2bp higher to 229.7bp.

In cash, we saw the AT1 market marked wider by 11bp (iBoxx index) and move to B+371bp – the most we’ve seen this year, but it is still 25bp tighter this year. The IG market rose by 2.5bp to B+104bp leaving it flat for these opening weeks of 2020. The rally in the underlying has them both comfortable in the black on a total return measure. The much longer duration sterling IG credit market also widened to G+131.8bp (+2bp), but returns have risen to 3.2% for January so far.

High yield markets took the brunt of the weakness. The HY iBoxx index gave up 16bp and was marked up at B+363bp.

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.