30th September 2020

🗞️ Q4: It won’t be getting any easier

iTraxx Main

59bp, -1.4bp

iTraxx X-Over

345.2bp, -2bp

🇩🇪 10 Yr Bund

-0.51%, +4bp

iBoxx Corp IG

B+128.8bp, -1bp

iBoxx Corp HY

B+486bp, -3bp

🇺🇸 10 Yr US T-Bond

0.69%, +4bp

🇬🇧 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″]

Whichever way you look at it…

For the most part, it was a recovery quarter which at its peak saw the S&P achieve a record high. Markets gave much back as volatility rose, though. However, the S&P still put on 7% through it. That’s the benchmark. The Dax added 3.5% in Q3 while the FTSE lagged again, losing 4.6%. In European credit, IG total returns (iBoxx index) were up a solid 2% for Q3, the high yield market delivered 2.5% in the same period while the sterling credit markets returned 1.7%.

The picture as we closed September paints a less upbeat outlook, reflecting the possibility for chaos as we head into the US election, the ongoing coronavirus pandemic continued to take a toll on macro, with a vaccine desperately needed to boost confidence and aid recovery. The S&P in September lost around 5%, the FTSE 1.4% and the Dax 1.6%.

In September, IG credit total returns were at least in the black at +0.35%, but the high yield market dropped 0.8% and sterling credit total returns were -0.6%.

The outlook is difficult, to say the least. Much hangs on the US election dynamic – the result, as much as the participants ‘accepting’ it without too much altercation. It’s fair to assume that the coronavirus pandemic isn’t going to let-up through the autumn and likely harsh winter months, but any news of an effective vaccine will front-run a recovery.

For the year to end September thus, the FTSE has fared worst and is down by 22% while the Dax has lost just 3.7% in the same period. The broader €Stoxx50 though has lost 14.8% in the opening three quarters of 2020. During that same period, the S&P index is up 4.6% and the Dow has lost 2.2%.

In credit, the sterling corporate bond market is the leader, returning 5.0% in the first nine months of 2020 helped by that huge rally in Gilts. Meanwhile, the Eurozone government bond market has returned 4.0%. IG corporate credit is up 0.8% in the same period, with the high yield market total returns at -3.2%. The latter is now unlikely going to get back to flat by year-end.

HY primary record next to fall

The primary market continued its merry way through September, right up until the final session. A near €44bn was lifted in the month, such that the IG non-financial corporate bond market set a fresh record for issuance as it hit the €320bn for issuance for the year. With three months to go, we think that another €50bn as a maximum would be a target to aim for.

We are going to need to weather much volatility, which might take us through much of November and much of it arising from that US election. Any clarity ahead of it and a definitive result after the voting closes might (or should) help to settle any frayed nerves. The demand for paper in the meantime remains undimmed, and the ‘policy-action’ mood music is for further easing, meaning lower rates for longer underpins the demand for corporate bonds.

Given the size of the pipeline, the high yield market will join the IG non-financial one in setting a new record for issuance this year. Another €14bn worth of deals before the end of the year is what’s needed – and entirely possible. €9.4bn was issued in September and judging by last year’s activity, €15bn – €20bn is possible in Q4 – market volatility permitting.

In senior financials, September’s deal flow of just €5.25bn is the lowest for any September since 2014. Once again, we ought not to expect much more given that the official funding windows are open and the near term macro outlook is relatively weak. The year so far to end September’s issuance has passed the €100bn mark though, up at €101.5bn. We are paring back expectations for the full-year and €125bn at most is a reasonable expectation.

Busy end to the quarter

There was a busy(ish) session in primary to close the quarter with. The demand side of the equation was robust and the demand for higher-yielding paper clear to see.

The stand out issue was a dual-tranche effort from Japan Tobacco which issued two €500m corporate hybrids. The first was a 60.5NC5.5 structure priced to yield 2.375% and the other a 63NC8.25 structure priced at 2.875%. Both were priced 50bp inside the initial guidance and books were up at an excellent €6bn.

Global Switch lifted €700m in a 10-year green bond, priced at midswaps+167bp, -23bp versus IPT with books at €1.65bn. And JC Decaux tapped its 2024 and 2028 issues for €99.9m each! In the sterling market, Western Power (South Wales) slipped in with £250m of a 15-year at G+125bp.

Such is the rage for green/ESG/sustainability bond issues, that Hamburger HochBahn saw fit to pull its intended €400m issue with investors preferring a benchmark (€500m min) sized deal! The borrower will back when they can find a way to spend the other €100m.

The high yield market had Volvo Cars which printed €500m of a green bond issue priced to yield 2.50% (-37.5bp versus IPT) and which managed good interest (mostly from IG accounts) of €2bn. OCI NV also printed €400m in a 5NC2 at a yield of 3.625% with the same again in dollars to yield 4.625%.

In senior financials, Aareal Bank was the sole borrower in the month’s final session, with €500m of a 6.5-year senior preferred costing midswaps+95bp which was 20bp inside the initial chatter, with books at just €1.2bn.

The UK economy slumped 19.8% in Q2, the ECB’s Lagarde suggested that the central bank would look at following the Fed’s lead on inflation overshooting, German unemployment in September declined to 6.3% (from 6.4%) and German retail sales rose by 3.1% in August (0.5% in July).

The US election debate was largely seen as a win for Biden although an embarrassing spectacle for the US, as the joust descended into farce on many occasions. The ADP employment report showed that the US economy added a higher than expected 749,000 private sector jobs (consensus was for 650k) as US GDP in Q2 came in a tad better than expected at a still eye-watering -31.4%.

That jobs data print boosted US futures before the open – to flat from up to 1% lower before, and helped European equities recover much of their earlier losses. In addition, US pending home sales shot higher to 8.8% in September versus 3.2% forecast, and all pointing to a building in momentum in the domestic economy. The US election debate will rage, but the markets will hold on to the potential for an improving US macro outlook.

Anyway, US equities shot higher by over 1% and the fairly decent losses across Europe were instantly erased, but we failed to hold on in Europe and closed around 0.5% in the red. A late sell-off pushed the 10-year Bund yield higher, to close at -0.51% (+4bp) while at the time of writing, the 10-year Treasury yield was up at 0.69% (+4bp).

In credit, the synthetic indices were modestly better offered (lower), with Main at 59bp and X-Over at 345.2bp. The cash market was focused on the new deals, but the slightly improved tone helped cash close unchanged to perhaps better bid.

The IG iBoxx cash index closed at B+128.8bp which was a basis point tighter in the session, but 4.5bp wider for September. The high yield index edged 3bp to B+486bp – but that represented a widening of 28bp for the month.

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.