21st April 2020

🛢️ Oil tanks, Risk off

iTraxx Main

91.3bp, +6bp

iTraxx X-Over

554.3bp, +45bp

🇩🇪 10 Yr Bund

-0.49%, -4bp

iBoxx Corp IG

B+212.3bp, +2.5bp

iBoxx Corp HY

B+671bp, +17bp

🇺🇸 10 Yr US T-Bond

0.55%, -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″]

Oil and trouble…

The high yield market had been outperforming. Who would have believed it? Admittedly it was only for a couple of weeks. We were always going to need some luck to keep it going. It’s likely now that the Verisure deal of last week will be it for a while – akin to a pop-up shop, testing the market and closing up quickly. Hit and miss.

The oil glut and subsequent price carnage have understandably hammered the mood, taken in many casualties, and along with it hopes of a V-recovery. We are probably having to contemplate a U-shaped one – at the very best.

So, suddenly there’s much wrong and after a couple of weeks of looking to the positives, the mood is looking decidedly grim. We’ve hit a wall and could do with some good news. It doesn’t look like it’s coming anytime soon.

Second virus waves beckon, the incompetence of the WHO is becoming more apparent, Trump is flailing and more desperate with each press conference. To add to that, there’s no vaccine imminent and the heavy toll (of US especially) coronavirus deaths continues apace.

Add into the more difficult developing narrative of a Q1 earnings season which promises to heap further pressure on valuations, especially as there is no forward guidance being given. No one knows. We’re on the back foot again. As it stands, a choppy April beckons but it is beginning to look like a pivotal month. The other side could be bright. Sell in May? Not in IG.

Primary shuts as risk appetite falters

After a bright opening on Monday, which saw Elia, Sodexo and JCDecaux add 5-tranches and €3.3bn to the April IG non-financial issuance pot, we effectively drew a blank on Tuesday (save for a small tap). There were a couple of sovereign offerings, namely from Luxembourg and Italy.

Still, we are riding high this month with some 7-trading session to go. April’s running issuance total is €41.70bn and the €48.6bn monthly record from March is in sight, and of course, so is that landmark €50bn level for the month.

We’re going to fall short, though, unless we can get some stability in equities and a modicum of returning confidence more generally. The demand for deals is clearly there, but the earnings season might see some companies blacked out as a consequence.

Monday’s deals saw up to 60bp or so of tightening (price discovery still going on!) and books subscribed by over 15x highlighting just that. And almost all of April’s deals were trading tighter than reoffer before this week’ sell-off. There’s plenty of cash to put to work.

Italy received €110bn of bids for its €16bn dual-tranche deal, one being a €6bn tap and the level of demand highlighting how ECB participation (price-insensitive, deep-pocketed buyer) is allowing certain sectors of the markets to get funded. Luxembourg issued €2.5bn in a dual-tranche 5 and 10-year trade off books of almost €10bn combined.

PVH, on the other hand – a US company and whose debt is ECB ineligible – paid up for an increased €175m of a July 2024 tap costing 3.625%. Demand was at just €215m.

Oil tanks again

On the earnings front, Coca-Cola said that it would take a material hit in Q2 (sales in the quarter already lower by 25%) and failed to give any guidance on H2, as expected. And that was after IBM did the same overnight. So, no forward guidance from these stalwarts with others mostly all set to follow, how to value equities?

Oil continued to tank with the June contracts now under some fierce pressure. Crude WTI was 41% lower and trading off a $12-handle while Brent, hitherto holding well, dropped 24% to $19 and change for a barrel.

The risk-off mood led to a decent bid for government debt, with safe-havens bid-up and the Bund yield down at -0.49% (-4bp), the Treasury at 0.55% (-7bp) and the Gilt yielding 0.29% (-4bp). All in the 10-year.

Equities took a decent leg lower with European bourses giving up close on 4%, the FTSE was around 3% lower and the US markets off by up to 3% at our close.

Credit index took a tumble with protection costs rising, reflecting the weakness through the day across all risk asset classes. iTraxx Main was 6bp higher at 91.4bp and X-Over rose by 45bp to 554.3bp.

Of course, the tone was set for cash to also receive some of the same medicine. We could be a lot worse but for the ECB hoovering up the IG market. Anyway, the IG market moved 2.5bp wider (iBoxx index) to B+212.3bp and ahead of a fraught banking sector earnings session, we’re seeing some apprehension creep into the CoCo market. The index moved 75bp wider, the 5th session of weakness, to B+975bp (+75bp in the session).

And then we had high yield. It’s had a good time of it so far. No financial crisis as such, but a health one resulting in an economic one. The real pain is probably yet to come. The index was 17bp wider at B+671bp.

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.