5th July 2020

🗞️ Plugging into the (initial V-shaped) recovery

iTraxx Main

64.0bp, +0.6bp

iTraxx X-Over

372.8bp, +5.2bp

🇩🇪 10 Yr Bund

0.44%, +1bp

iBoxx Corp IG

B+153bp, unchanged

iBoxx Corp HY

B+520bp, -2bp

🇺🇸 10 Yr US T-Bond

0.67%, unchanged

🇬🇧 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″]

As IG primary records broken…

The bounce in economic activity (from the early 2020 Q2-lows) will likely continue with a broadly positive trend in asset prices over the summer months. We could still be looking at the potential for US stocks to rise and get close to those record highs seen in February before the year is out. Rates look anchored though. Credit spreads will tighten if equities manage that rally.

There will be stumbles and dents in market confidence en route. And it’s most likely going to come courtesy of the Q2 earnings season and virus-related lockdowns. Both have the potential to inject considerable volatility into the markets through July and August. We think the increased stirrings of global discontent against China on several fronts will only lurk in the background, for now.

Credit primary, the only market functioning in this asset class – for what feels like has been a decade or so, is still buzzing nicely. We come off the back of a record quarter of deals in IG non-financials (€50bn+ per month in Q2).

The chart shows just how the coronavirus pandemic has unleashed fear into corporate treasury departments. How Q3 plays out is anyone’s guess, but we could well be heading for the best Q3 in the European corporate bond market’s history. For July, after just 3 sessions, we are already up at €8bn for the month although €6bn of that came courtesy of that jumbo Bayer deal.

Few have taken any chances, and where possible, corporates are thinking bloated balance sheets are a sign of being prudent with finances. It has helped that rates are at rock-bottom levels and copious levels of liquidity residing with investors is looking for a ‘safe-haven’ asset class which offers some yield above the risk-free rate.

We are at €267bn of issuance for the year, and now just €4bn shy of 2020 already being the second-best year for issuance on record. The pipeline looks decent and the summer break is likely going to be shorter than usual, crammed into a 2-3 week period in early August at most, we think. €400bn for the full year is a reasonable target.

And we also are witnessing a good recovery in high yield primary. It was only a quarter or so ago that we had zero issuance for a 6 week period. March drew the blank. But €13bn of deal flow in June marks it as the best June on record. €43bn for the year to date is the running total and we are already re-assessing our view that the €76.4bn annual record will not be broken. It likely will.

That high yield market’s improved issuance dynamic comes despite Wirecard’s collapse and unproven illegal share dealings at ams AG’s, which eventually got its deal away last week. Investor risk appetite clearly remains intact and it would appear investors have built in some resilience to negative events which previously might have completely derailed the HY market.

So it’s not quite plain sailing ahead but we have a good chance. We know that the earnings season isn’t going to be great. It’s been well-flagged and so the market can get over it, although future guidance might lead to some reassessment in valuations. For the moment, those virus-related lockdowns especially across the US are being ignored, we think, because the economic data is improving.

Look to the bright side

IG cash moved moderately tighter last week, leaving the index at B+153bp (-3bp in the week). The broad macro/equity market picture will dictate if this market tightens towards the +120bp area by year-end. It’s going to be difficult to picture getting to flat (-50bp from here) given the welter of issuance we’re seeing and likely coming over the second half.

We’re not going to see much by way of AT1 deals, but spread direction will depend squarely on equity markets. The index closed last week at B+686bp (-37bp), and at best, we will probably be looking at around B+500bp come year-end.

As for the high yield market, the index is at B+520bp (-20bp last week) and is now not necessarily moving in lock-step with equities unless there is a major sell-off in the latter. Investors are content to sit on portfolio positions, secondary market liquidity isn’t helping anyway, but any hopes of an economic  recovery results in a reluctance to trade. The index is now just 170bp wider this year, which we think suggests a good recovery.

We will have to wait until next week for the earnings season to get fully underway with the likes of JP Morgan, Goldmans, BofA and Morgan Stanley all due. But we will also have Coca-Cola, Tesla, Amazon  and Facebook added to from the likes of Ford, GM and Caterpillar in what potentially could be a defining week for the quarter.

More immediately, the economic calendar suggests we don’t have the busiest of weeks. We have Eurozone retail sales (May) and the full gamut of Markit PMIs for the US on Monday, wrapping up with US inflation data on Friday with little really in between (Chinese inflation, Germany factory output/orders).

We have more negotiations on the Brexit front, with the EU also debating its budgetary situation. Focus for credit market? Primary.

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.