11th February 2020

😷 A sharp intake of breath

iTraxx Main

42.9bp, -0.6bp

iTraxx X-Over

210.5bp, -2.6bp

🇩🇪 10 Yr Bund

-0.39%, +2bp

iBoxx Corp IG

B+102bp, -0.5bp

iBoxx Corp HY

B+336bp, -7bp

🇺🇸 10 Yr US T-Bond

1.58%, +3bp

🇬🇧 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″]

Hoping for the best…

Markets are back to trading the headlines. Their inertia rarely seems to last too long. Any data which suggests that there is a slowdown in the spread of the virus and the market rallies – and rallies hard.

And so the markets have recovered after a period weakness to hit record highs again in the US, as the rate of infections slows. In some respects, investors in the US are almost completely ignoring the closure of China Inc, judging by the robustness of asset prices there – or just anticipating Fed action to limit any downside risks.

It is going to become apparent soon enough as to whether the spread of the coronavirus (now named Covid-19) is ultimately going to get under some kind of control – and the number of cases outside of China is contained. Or it is all going to go awry. It’s become very binary.

Those ominous warnings, about ‘sparking bigger fires’ and all that, from a hitherto cautious and perhaps vacillating WHO appears to be laying the ground for a ‘get out of jail for free’ card for the under-fire organisation. That is, we can expect the announcement of a Covid-19 pandemic imminently.

Markets, though, are not trading as though they are expecting the worst. That is, there is still a view that the authorities outside of China can contain the virus’ spread. Hence it would follow that the economic fall out will be contained and weakness confined to Q1 only.

During the session, it emerged that 160m Chinese were due (allowed) back at work over the next week, giving rise to hopes that we’ve seen the worst of Covid-19 (in China, anyway). So it’s fingers crossed that from Q2 onwards we will see a recovery to help Chinese growth shoot back to towards those 6% levels for the year – and global growth will recover to closer to 3.4% (IMF outlook 2020).

We don’t believe it will quite play out like that. We are, however, looking at prolonged economic weakness, but not necessarily a major macro catastrophe. Central banks will be called into action soon enough. Risk markets will do their best to muddle through, knowing ample liquidity will feed the rally.

Multi-tranche deals becoming the norm

Primary re-opened with a really solid session, littered with deals across the various asset classes, in a ‘something for everyone’-like day. Once again, we had a euro-denominated sovereign deal – massively oversubscribed, multi-tranche, dual currency IG non-financial issuance – also well subscribed, senior financial issuance and covered bonds.

IG non-financial primary is the much-needed sector for issuance given we’re still playing catch-up with expectations. It’s been a relatively disjointed, disappointing start to the year.

Anyway, it was Siemens’ turn this time. The German industrial giant a issued a 4-tranche euro-denominated deal and added a sterling tranche to the mixer, too. They issued €1bn in a 3-year at midswaps+20bp, €1bn in a 6-year at midswaps+25bp and €1bn in a 9-year at midswaps+35bp. They also took €1bn in a 12-year at midswaps+43bp with a greatly increased £850m in a 50-year at G+60bp. Combined books for the euro-denominated deals came in at over €10bn with the sterling offering garnered over £1.9bn of orders. The deals were priced 20-27bp inside the initial guidance across the tranches.

British Telecom plumped for a hybrid deal, as it took €500m in a no-grow 60.5NC5.5 structure priced to yield 1.875%, which was 62.5bp inside the opening talk, but made possible given the demand for the offering was at around €5bn.

In financials, we had €1bn printed by Svenska Handelsbanken of a 10-year senior non-preferred at midswaps+58bp (-17bp versus IPT). There was €750m offered by Banco BPM in a 5-year senior non-preferred priced at midswaps+193bp (-27bp versus IPT).

And a super busy Banco Santander this year was again back, this time for £500m in a 7-year senior non-preferred sterling deal at G+135bp.

In the sovereign space, all eyes were on Italy. They issued €9bn in a 16-year maturity at midswaps+5bp (-4bp versus IPT) off books which came in at a massive €50bn. The UK added a £2.5bn via a tap of the 1.625% 2071 issue, with demand for the offering in excess of £25bn.

Euphoric markets: What risks?

There is no denying the buoyancy in these markets at the moment. We saw more records being set in the US markets while in Europe, we’re approaching record highs in many cases as well. However, it is not as if it is risk-on with wanton abandon. Because there is still some caution as reflected in the support for safe havens.

The focus away from Covid-19 was on the UK. The government finally approved the £106bn HS2 rail project as expected, while UK GDP growth in the final quarter of 2019 showed that the economy had stagnated but the economy grew by 1.1% in 2019 as a whole.

The Fed’s Powell, in his congressional testimony, said the risks to the outlook remained and that they were keeping a close eye on developments. The US markets opened brightly and moved higher still through the early sessions. The Dow, S&P and Nasdaq saw fresh record intraday highs in the session while the Dax visited a new intraday high and we ended with gains of up to 1% across Europe.

There was a small amount of weakness in rates, with the yield on the 10-year benchmarks seeing the US Treasury yielding 1.58% (+3bp), the Bund -0.39% (+2bp) and the Gilt 0.57% (+1bp).

And then there was credit. This market has managed to slip through the cracks, bereft of any of the volatility besetting equities and rates. It was probably helpful that the ECB is busy lifting a good chunk of the market – €1,442m last week (€1,613 the previous week), as its holding of corporate bonds rose to €190,559m.

That rally in equities was obviously a driver for lower protection costs. As such, iTraxx Main edged lower to 42.3bp (-0.6bp) and X-Over was 2.6bp lower at 210.5bp.

In cash, it was better all round. IG spreads edged tighter leaving the iBoxx index at B+102bp (-0.5bp) and the AT1 index moved to B+339bp (-10bp), inching ever closer to record tights. In high yield, we also had a bit of a squeeze on, the iBoxx index here tighter at B+336bp (-7bp) – and now just a shade off the tights seen a couple of weeks ago.

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.