21st September 2020

🏦 Stench of Scandal in the Air

iTraxx Main

57.8bp, +2.3bp

iTraxx X-Over

327.7bp, +29.1bp

🇩🇪 10 Yr Bund

-0.53%, -4bp

iBoxx Corp IG

B+124.9bp, +2.3bp

iBoxx Corp HY

B+463bp, +14bp

🇺🇸 10 Yr US T-Bond

0.66%, -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″]

HSBC’s bread buttered on the wrong side…

We’re back in one of those periods, where market falls – sometimes as much as 3-4% leave some to ponder once again that it’s all over. Of course it’s not the case, but the headwinds are a clear and present danger. Every excuse was trotted out for the sell-off. Virus second wave lockdowns and US election jitters came second and third. But it was the weekend FinCEN leak on global banks’ suspicious activity reports, adding a further ingredient to an already hugely spiced-up cooking pot, which topped the list. Something may come of it, it may not, but the hit on banking stocks will see a significant dent in investor confidence.

Of course, banking stocks took a big hit. Fear of US action will grate and instills much fear into the beleaguered banking sector already feeling the pain of low rates and busted the global economy. HSBC (and Standard Chartered), already in the crosshairs for their ‘support’ of the Chinese authorities on the Hong Kong security laws – and still possible contenders for the China ‘unreliable entity list’, will now be feeling under huge pressure of an expected call from the US authorities especially). As if an excuse was needed.

Macro wasn’t quite on the back burner in the session, because we still have the matter of lockdowns, which in the case of the UK might still mean a full national one. Watch this space. Unfortunately, we are now witnessing anything but a V-shaped recovery with the letter defining said recovery shifting – at best – to a W! Just as well didn’t have much by way of economic data during the session.

Credit markets got off to a slower start for what many expect is going to be a particularly busy week, which might well see primary markets break several records. Of course, it will always depend on broader market sentiment to help keep issuing windows open. For IG non-financials, and despite it being a big risk-off day, we can always rely on Fresenius, the darling of the (German) credit investor community, to print.

Julius Baer AT1 deal becomes a victim

Bank Julius Baer was a casualty of the weak backdrop for financial institutions. As the scandal develops – which it will – it will likely curtail much more issuance of this kind, likely in other subordinated structures and even senior deals. More clarity will re-open the market.

Having gone out with an AT1 PNC7 deal at 4.5% and setting the final coupon for an expected $350m issue at 4.375% off an order book of only $875m, the issuer pulled the deal. Market conditions, maybe something coming up at the due diligence related to the story of the suspicious transaction or whatever, it was a case of ‘no deal’.

However, not affected by the weaker markets or the headline risks was Fresenius. The medical equipment/diagnostics group issued a couple of €500m tranches, in what was generally a rare off-day for the corporate bond primary market.

They priced at midswaps+90bp for a 6-year and midswaps+130bp for a long 12-year, which were around 20bp – 25bp inside the initial price talk across the two tranches, off books at €2.6bn. The deals chipped away at the record annual issuance of last year (€318bn) such that just another €10bn will see us at a new annual record.

Bid for safety

Banks took a hit as did travel companies on fears of second wave lockdowns. Equities dropped hard across the various bourses. The Dax lost over 4.5%, the FTSE 3.5% while US equities were 1% – 2.5% lower across the various markets late into the US session.

There was a better bid for rates. The yield on the benchmark 10-year Bund dropped to -0.53bp (-4bp), the Gilt yield fell to 0.15% (-3bp), and as at the time of writing, the Treasury was yielding o.66% (-3bp).

The iTraxx senior financial index was at 61.6bp and the subordinated financials index at 127.8bp, respectively, ahead of the laundering allegations. At the close of business on Monday, they had gapped by 16.2bp (to 77.8bp) and 25.8bp (to 153.6bp), respectively. Main was just 2.3bp higher at 57.8bp but X-Over jumped 29.1bp higher to 327.7bp.

The follow-through into the secondary cash market saw obvious weakness, in an illiquid market where low flow and volumes really affected the visibility for traders. So they were defensive. Nevertheless, few are going to be concerned with the perceived weakness in the session given that credit generally has held up very, very well through a period of volatility and weakness observed in other risk asset classes this year.

The IBoxx IG cash index saw its biggest move for several weeks, 2.3bp wider at B+124.9bp. There was a much larger, or obvious pullback in the AT1 market, as the index here moved to B+642bp (+35bp). Sterling IG corporate credit moved in line, the index up at G+156bp (+2bp). And finally, in high yield, amid little flow the Street’s defensiveness saw the index at B+463bp (+14bp) at the close.

Let’s hope for a better Tuesday.

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.