15th November 2020

🗞️ Still plenty of market upside

iTraxx Main

52.2bp, -0.2bp

iTraxx X-Over

297.8bp, -1.4bp

🇩🇪 10 Yr Bund

-0.55%, unchanged

iBoxx Corp IG

B+109bp, unchanged

iBoxx Corp HY

B+412bp, +1.5bp

🇺🇸 10 Yr US T-Bond

0.89%, unchanged

🇬🇧 FTSE 100

6,136, -23

🇩🇪 DAX

13,076, +24

🇺🇸 S&P 500

3,585, +48

Despite the virus second waves…

Judging by the market movements over the past few ‘post-rally’ sessions, some concern has taken over investors’ thinking on second wave pandemic coronavirus cases surging through Europe and the US. The soul searching has left rates almost suddenly better bid. Equities have edged off the recently achieved record highs but could easily bounce back. Credit spreads squeezed hard initially but are now probably in the process of re-establishing a fresh trading range at tighter levels, needing the push from higher equities to elicit any material spread tightening response.

It is clear that there is much circumspection on the dynamics of any macro recovery and the time it will take for a vaccine to make a real difference. There is a vaccine in the works – maybe two or three more that will ‘do the job’, but when?

Recovery will be laboured outside any immediate push higher off those quite depressed early Q4 activity levels. That was because the sweeping lockdowns – across Europe anyway, to try and contain the second wave spread will further push back the timing and recovery trajectory of it. It’s not lost on us that macro was in dire straits across Europe pre-pandemic, while growth was running below trend in China. The US economy was looking more upbeat but not exactly heading for the moon.

The ECB had/has long been espousing caution on the outlook with risks to the downside being aired in most of the monthly meetings. The Fed had increased QE while both central banks (and the BoE) were on hold on interest rates through 2021/2022 at least. We are likely going back to pre-pandemic GDP levels at best only by the end of Q2 2021, as the second wave takes its toll.

There is light at the end of the tunnel. But yields are going to stay low. Demand for higher-yielding product will keep rates better bid generally – but corporate credit should do much better. The low-hanging fruit has been picked, but there is still more to go – meaning spreads go tighter for sure, corporate bond yields lower and funding costs for corporates stay at historically low levels through 2021.

Markets to rise pre-Thanksgiving

The vaccine-fuelled market euphoria faded quickly, but at least the US markets showed signs that we can move higher some more as we closed out on Friday. The squeeze in spreads made for good reading and performance, especially for the more volatile (and previously under fire) US HY market. Rate markets initially sold off, but a level of circumspection returned midweek onwards to check the sell-off and we resumed a slightly better bid for duration.

The virus second waves will persist at a high level through December at least. So there is unlikely going to be another major surge higher in risk asset prices soon. We look for something more range-bound but with a rising bias in risk prices.

Markets will nevertheless be bolstered once other vaccine developers announce their own positive results (AstraZeneca this week?) – as governments gear up for vaccine distribution. But we now know that these vaccines are imminent, so there will be little additional impetus for a material rally on the back of any news.

We closed last week with US equity markets adding over 1% on Friday, the FTSE lost 0.4% and the Dax was 02% higher. the strong close in the US augers well for a positive start this week. Rates closed unchanged (10-year Bund yield -0.55%, Treasury 0.89% and Gilt 0.34%).

Primary was hit and miss for corporates with little getting away. We had just three IG non-financial borrowers lifting €2.1bn, senior bank issuance was better with €8.6bn printed while in high yield, a little under €900m was issued from two borrowers. HY volume of issuance YTD is now just €500m from last year’s record €76.4bn.

Spreads only edged tighter last week, but the previous week’s rally and this week’s renewed bid for duration has boosted returns. So, IG total returns have increased YTD to 2.2%, and the AT1 market has clawed its way back to +1.4% of total returns this year so far. Amid a Herculean-like effort/recovery, the high yield market is back to -0.4% of total returns (iBoxx index) for investors, year to date, having been well in the red only just a couple of months ago.

So this week will have investors keep an eye on the trend in coronavirus transmissions, amid early signs that the second wave may be peaking across Europe. The earnings season, which has generally been much better than expected, draws to a close.

On the economic front, we have a host of data from China on Monday (industrial production, investment and retail sales). In the UK it’s inflation data and retail sales with the US also reporting retail sales and industrial production as well as a host of housing data. It’s quieter in Europe, with only consumer sentiment perhaps worth a look at.

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.