14th September 2020

🌊 Second wave? Markets making a second push, more like

iTraxx Main

54.8bp, -1.8bp

iTraxx X-Over

320.0bp, -5.7bp

🇩🇪 10 Yr Bund

-0.48%, unchanged

iBoxx Corp IG

B+124.7bp, unchanged

iBoxx Corp HY

B+450bp, unchanged

🇺🇸 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″]

M&A frenzy boosts markets…

The assault on the record for annual issuance in the IG non-financial euro-denominated corporate primary bond market is on. Heading into the second half of September after €22bn of deal volume this month, we are now less than €20bn short of the 2019 record of €318bn. The pipeline is bursting and it’s fair to say that demand is also at very high levels. The corporate sector is getting cheap cash on board for whatever reason – like bolstering balance sheet liquidity, perhaps ahead of any refinancing of maturing obligations, or because it’s just cheap. Investors are clipping whatever coupon they can.

There was a bit of a deal frenzy in the market. Oracle has a deal with TikTok, Nvidia has a deal with SoftBank to buy Cambridge chipmaker ARM Holdings for $40bn, amid talk that Softbank might go private – and we started with enough to keep equity markets on the front foot. Add in a hostile bid for private security group G4S as well as rumours of a project to merge UBS with Credit Suisse, and the mood music has shifted a little. That will all have been helped by a resumption of the AstraZeneca phase 3 vaccine trials amid some upbeat words from the Pfizer on its own vaccine trials.

We might see greater levels of equity market volatility – in a few weeks’ time, as that early November US election date approaches – but there is room for a decent rally before then to help soften the blows which might come.

We think that there is every chance that at least IG spreads get back to being close to flat for the year (iBoxx index still +20bp), but the higher beta markets – namely HY and AT1 won’t get there. They will, though, continue to recover and total returns in these higher beta sectors should at least recover to get holdings back into the black for 2020.

The tea leaves just don’t appear lined to get that spread rally required. The AT1 index needs to tighten by 36% and the HY index by 23%, between now and year-end. We think the IG market has a better chance. The aforementioned are going to need to overcome US election-related volatility, the potential for a ‘zombified’ HY corporate sector unnerving investors and ongoing macro risks as economies struggle to recover from the pandemic lockdowns.

Some of the latter was demonstrated in the day’s Eurozone industrial production data, which for July saw a continued rebound but still lost steam versus the May and June recovery dynamic. Month-on-month industrial production rose by 4.1% (versus 9.5% in June), although that was just ahead of consensus (4.0%).

Primary promising much this week

There was a flurry of deals across the market in this opening session of the week (especially in dollar markets), and there is likely a heavier load to come through the week. Sterling deals were prevalent again, we had Mexico in the market and €3.1bn from Coca-Cola and ChemChina for the non-financial corporate market.

So Burberry took £300m in a 5-year at G+135bp, which saw interest of £2.35bn and allowed leads to cut the final pricing by 45bp versus the initial chatter. Also in sterling, Coventry Building Society issued £250m of a senior preferred at G+120bp.

In the real estate investment trust area, Digital Realty issued €300m of a 3-year floater at Euribor+48.4bp and €750m of a 7-year at B+125bp (-40bp versus IPT), on combined books of €5bn.

Mexico went the more fashionable sustainability bond route, with €750m of a 7-year deal at midswaps+195bp, -40bp versus IPT and books up at almost €5bn.

And then there was the IG non-financial duo in the form of Coca-Cola and ChemChina. The latter issued €500m in a no grow 4-year priced at midswaps+168bp, which was 37bp inside the initial guidance off a book at only €1.75bn.

Coca-Cola’s deal was a three-tranche offering, taking in €1bn in an 8.5-year at midswaps+45bp, €750m in a 12.5-year at midswaps+60bp and €850m in a 19.5-year at midswaps+80bp. The deals were priced 15bp – 20bp inside the initial talk across the tranches, and combined books were at over €5bn.

M&A, vaccines… hope

European equities closed unchanged even as the US markets were roaring ahead and upwards of 1.7% in the black, as at the close n Europe. There was that aforementioned M&A and vaccine news for them to cling on to, but it wasn’t enough to help generate a more upbeat European market.

There is much happening around the Brexit trade deal and UK politics will serve up a feast of headlines on the Internal Market Bill – as well, perhaps, a bit of volatility for UK equity markets.

Rates did very little in the session, leaving the Bund yield in the 10-year benchmark at -0.48%, the Gilt to yield 0.20% (+1.5bp), and the Treasury unchanged and yielding 0.67% as at the European close.

In credit, the market wasn’t doing much int he session. The synthetic indices reflected the cheapening in protection costs though, as Main moved 1.8bp lower to 54.8bp and X-Over was 5.7bp lower at 320bp.

As for the secondary cash market, and ahead of the anticipated supply, IG cash was unchanged leaving the iBoxx index at B+124.7bp. As it happened, we had the same for the HY market, the index left at B+450bp while even the recent spate of sterling corporate bond issuance failed to have an impact on that market (index at G+156bp)!

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.