2nd December 2020

🎄 Seasonal greetings, indeed!

iTraxx Main

46.7bp, +0.5bp

iTraxx X-Over

250.7bp, -0.6bp

🇩🇪 10 Yr Bund

-0.52%, unchanged

iBoxx Corp IG

B+102bp, -0.5bp

iBoxx Corp HY

B+362bp, -4bp

🇺🇸 10 Yr US T-Bond

0.95%, +2bp

🇬🇧 FTSE 100

6,460, +75

🇩🇪 DAX

13,313, -69

🇺🇸 S&P 500

3,664, +2

The going’s about to improve…

We’re off to a flying start for December. The headline US equity S&P index is less than 1.5% from 3,700 and sits at around its record levels, poised for a tilt at that summit. All markets are being dragged higher because of it. Credit tighter. Commodities likely higher as macro recovery gathers pace. Even Bitcoin will be better bid at its own heady levels.

The Dow will look to break through 30,000 again. Most European markets are back in the black for the year (despite some weakness on Tuesday), just as the FTSE outperforms on Brexit hopes and the macro recovery benefits the international flavour of the earnings bias the companies in the index generate.

It’s all good. In this mood, the market swats aside the usual concerns it might have on the geopolitical front, on how the pandemic might ravage economies through the winter months and any emerging headlines risks on other issues.

There was further excitement on Tuesday as the UK approved the roll-out, from next week, of the Pfizer/BioNTech vaccine. Although it’s the first country to do so, that was tempered by renewed/ongoing concerns about the potential for a Brexit-trade agreement. On that issue, this week looks to be the crucial one.

Investors are projecting further ahead, though. Now is not the time to sit and wait. We could have a more bullish December than previously envisaged. The business end of the year has under a couple of weeks in it yet, in our view, due to finish at the end of next week. There is a good chance though that we might be looking at it being extending through the third week of the month.

Whatever happens, the excitement and expectations of investors will push risk markets to higher levels in the coming weeks/months. In credit, we have to be looking at spreads going tighter – and to record tights in IG through the first half of 2021.

We would also think that the bid for higher-yielding assets will see better performance/returns from the high yield market and significant compression between IG and HY markets.

Steady, but wants to go higher

Through a steady session after Monday’s rally, the data saw German retail sales for October well ahead of expectations, PPI for the Eurozone was slightly higher than expected and the region’s unemployment rate was a touch improved at 8.4% (8.5% previously).

We’re not sure why the FTSE managed to outperform all markets during Tuesday’s session, as it gained over 1.0%. Some of it would be down to currency weakness, but we think most of the gains can be attributed to the vaccine roll-out news and perhaps hopes that there will be an agreement imminently on the Brexit-trade negotiations. The index has been this year’s biggest equity market underperformer and still has some ways to go to catch up.

Other European markets were up to 0.6% in the red, while the US markets opened up to -0.5% lower before getting closer to flat as we closed in Europe. Rates were steady/better offered, and yields flat/touch higher. In the US, the 10-year pitched up at 0.95% (+2bp), the 10-year Gilt was at 0.35% (unchanged) and the Bund was left at -0.52% (unchanged).

In the corporate bond market, Monday’s busy primary session wasn’t quite repeated but there were deals on the screens. IG non-financial borrowers included Molnlycke’s increased €400m 4-year offering priced at midswaps+85bp (-25bp versus IPT off a €1bn book). National Grid tapped its 2020 issue for a further €100m at midswaps+85bp.

Poste Italiane issued €500m in a 4-year at midswaps+45bp and a further €500m in an 8-year maturity at midswaps+85bp. Combined books for this deal came to €6bn+ and final pricing was 35bp inside the opening talk across the tranches.

Other deals saw Credit Agricole issue €1bn in a 7-year social senior non-preferred at midswaps+60bp and the unrated SIXT SE lifted €300m in a 4-year to yield 1.75% (-50bp versus IPT, €580m books).

In the synthetic space, the indices closed mixed but with just moderate moves leaving iTraxx Main at 46.7bp (+0.5bp) and X-Over at 250.7bp (-0.6bp).

The cash market saw a slightly better bid, leaving the iBoxx IG cash index at B+102bp (-0.5bp) and now 1.5bp tighter this year. The high yield market was 4bop tighter on the index, left at B+362bp (-4bp) and just 17bp wider for the year capping off an excellent recovery over the past couple of months.

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.