11th November 2020

🗞️ Readying for the next big leg higher

iTraxx Main

50.4bp, unchanged

iTraxx X-Over

293bp, +3bp

🇩🇪 10 Yr Bund

-0.51%, -2bp

iBoxx Corp IG

B+108bp, -1bp

iBoxx Corp HY

B+409bp, -1bp

🇺🇸 10 Yr US T-Bond

0.96%, unchanged

🇬🇧 FTSE 100

6,382, +86

🇩🇪 DAX

13,216, +53

🇺🇸 S&P 500

3,575, +30

Near term ‘V’ anticipated…

After the euphoria, now there is calm – and the need to take a sober look at the situation. It’s going to be bright for markets, we believe. The economic normalisation process – albeit if only back to pre-pandemic levels of activity will elicit a bullish investor response and risk asset valuations will rise, potentially quite significantly.

Obviously, Trump is still hopeful. But Biden will surely be inaugurated. We have news of a vaccine and that will be the predominant driver for the rest of this quarter’s performance. There’s been a little circumspection about the vaccine from some quarters, but the Pfizer/BioNGen effort will be added to by others. We should therefore be nearing the endgame of the constant lockdowns and find a floor and that is what the markets are cock-a-hoop about.

Growth will turbocharge off it but that doesn’t mean we have suddenly found the answer to all the macro ills that were blighting the landscape before the virus took hold.

Rates were negative or being cut and we had massive QE before the epidemic. The Eurozone economy was flailing and struggling to recover from its decade-plus long malaise. The UK was/is in a similar position. And that’s before Brexit, finally coming up in a few weeks’ time. The US economic situation was more of a bright spot but there was still need for the Fed to suggest policy rates were going nowhere for years.

However, growth will go through a steep rise in the next couple of quarters and we should get back to close to pre-pandemic levels of activity. After that, well that’s anyone’s guess. But markets will react to it. Equities will surely rise and valuations will look even richer. Credit spreads will tighten as well – and spread markets will also look a lot richer.

Rates will probably see a sell-off, too, but they won’t rise past pre-pandemic levels. For instance, that 10-year benchmark Bund yield at best is unlikely to rise past -0.30% anytime soon (currently yielding -0.51% and has been at -0.64% in the past week). The European economy anyway is in some sort of zombie-like state and hoping that over the medium term, Chinese and US macro recovery will pull it up from these depressed levels. As almost always.

In the meantime, the IG iBoxx index is now at B+109bp – just 5bp off where is sat when we started 2020. That’s some 150bp off the pandemic-induced wides. And over 10bp tighter this week.

There wasn’t anything in primary the session in terms of euro-denominated corporate bond issuance. The deal flow has been very limited, the sluice gates opening only really seeing a plethora of SSA issuance. The US corporate markets are going gangbusters but we have only had two IG non-financial deals so far this month in the euro markets. Thames Water Kemble Finance issued £250m in a 5.5NCL issue offering 4.625%.

Senior bank issuance has been a bit more sprightly with €9bn printed so far this month, while the late pricing of the Pure Gym deal (€445m, 5.5%) on Tuesday leaves the HY market just €500m short of issuance away from setting a new annual record. That’s just a deal or two.

It is looking good

So the day passed without too much on the macro news flow front to get excited, or otherwise, about. The next step is where to from here. Biden’s in – or will be. Trump’s out – but as expected, it’s being suggested that we will make another run for the top job in 2024. He will be gone soon enough.

More immediately, markets are still hopeful that we have turned a corner and the Pfizer/BioNTech COVID-19 vaccine will be added to very shortly by the AstraZeneca/Oxford University one. So we’re in that period where the future looks brighter and as we close in on year-end, thinking about the outlook for 2021.

In the near term, the S&P should see out 3,700 and the Dow will pass 30,000 – we think this side of 2021. The Dax will hit new record highs in Q1 if not before and the lagging FTSE must be back on course for 7,000 plus (around 6,350 now).

That optimism feeds into tighter credit spreads. The record tight IG level as measured by the iBoxx index is B+82bp. Currently, the index levels reside at B+108bp. A sub-82bp record tight level is now a real possibility sometime in H1 2021.

The bullishness of that move might not be reflected in the same way for the high yield market – that will depend on how post-covid corporate defaults materialise into the macro recovery. The AT1 market though will see spreads/yields drop as banks make the most of steeper curves and the macro recovery dynamics.

During the midweek session, the FTSE added another 1.35%, the Dax 0.4% and is now just a few points away from recovering to flat for the year. As at the time of writing, US markets were up to 1.8% higher with the Nasdaq leading the way having suffered much in the last few sessions.

In credit, the synthetic indices are largely unchanged with Main at 50.4bp and X-Over at 293bp. The cash market was quiet but still managed to tighten a touch, edging a basis point better (iBoxx) with the index now at B+108bp. And finally, in the high yield market, the index closed at B+409bp (-1bp). Much of the heavy work was done in Tuesday’s session.

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.