28th October 2020

🙏 It really might be all over

iTraxx Main


iTraxx X-Over

372bp, +31bp

🇩🇪 10 Yr Bund

-0.63%, -1bp

iBoxx Corp IG

B+125bp, +3bp

iBoxx Corp HY

B+480bp, +13bp

🇺🇸 10 Yr US T-Bond

0.76%, -2bp

Macro grinding to a halt…

The rampaging coronavirus is to blame but central banks have long used up any effective firepower to stem the misery that will come with this next spate of lockdowns. Personal tragedy abounds but it’s also difficult not to look at it as some kind of financial armageddon being the end result. Global macro is going to take a tumble but the Eurozone, in particular, is in it for it. The region’s central bank is firing blanks. Everything hinges on the development and roll-out of an effective vaccine.

Primary has slowed to a trickle unless SSA-related. There is no point at the moment coming to the market if a corporate – especially if high beta. Equity volatility is too high and the coronavirus spread is simply getting worse. But the whole gamut of corporate entities did have a good 3 months to get their house in order and issue way before the US election which, if truth be told, was well-flagged as a potential volatility hot spot.

So, no sympathy for corporate treasury desks who feel they might have missed their moment. The next ten days (at least) are going to be as difficult.

And not just because of the US election. The coronavirus is now rampaging across Europe and the US. Germany is coming up to a partial lockdown, France is locking down and Italy, Spain and Eastern European countries are in the doldrums. Macro is about to take a huge hit again.

Equities have taken a caning, credit spreads have shifted wider, rates are only slightly better bid at the moment and policy action is desperately needed to stem economic armageddon. The Eurozone is the epicentre of this second wave and the economy is going to suffer worse (we think) than it did the first time around.

That’s easy to deduce because Germany is in line to suffer a lot more so this engine for growth will splutter much before it comes to a juddering halt. That’s just as all the Eurozone economies are on the edge of collapse.

The ECB is low on ammunition; It has long since had no effective policy response. Driving yields even lower through more QE pumping liquidity into the financial system isn’t going to help. They’re pushing on a string even if the next step is to literally buy everything sight.

Time for tin hats

In the most miserable of sessions, the DAX gave up over 4%, the CAC well-over 3% and the FTSE 2.6%. As at the time of writing, the US markets were over 3% lower. The news flow was just about the worst it could have been throughout the day – record cases and increasing death rates, although the latter in most countries is nowhere near as bad as they were in the first wave earlier this year. That’s something to hang on to.

There was no dash to safety, though. The coronavirus ‘event’ does quite warrant it. But the slightly better bid for rates saw the benchmark 10-year Treasury at 0.76% (-2bp), the 10-year Bund yield at -0.63% (-1bp) and the Gilt yield at 0.21% (unchanged).

The corporate bond default rate expectations must be due for revision. A depressing Q4 will likely tip a few more over the edge into default territory and that 6-7% forecasted peak range by Moody’s is under threat. Investors have been spooked as evidenced by the better bid for protection, seeing iTraxx Main gap 8bp to 64.7bp and X-Over gap 31bp higher to 372bp. It feels like there is more to go.

Apart from adding protection on such volatile and weak days, there is little cash credit investors can do. Poor secondary market liquidity come from the Street in no way entertaining a bid for paper. Horns are pulled in. There is no market. Certainly, primary’s window slammed shut with barely a handful of SSA deals getting away.

The iBoxx IG cash index moved 3bp wider to B+125bp leaving us with the feeling that there is more widening to come. As we might have expected, the higher beta segments saw more widening, if not disproportionate, and that left the HY index some 13bp wider at B+480bp.

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.