25th June 2020

☀️ Summer’s here, but no holiday just yet

iTraxx Main

69.5bp, +0.7bp

iTraxx X-Over

397bp, +4bp

🇩🇪 10 Yr Bund

-0.47%, -4bp

iBoxx Corp IG

B+155.5bp, +3bp

iBoxx Corp HY

B+540bp, +10bp

🇺🇸 10 Yr US T-Bond

0.67%, -1bp

🇬🇧 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″]

Credit still dealing…

A calmer session that didn’t quite follow through on the midweek wobble, but be assured that there will be a few more of them before we have a grip on this virus. That wobble was after PMIs and other data showed we were in some sort of a recovery mode, even if the IMF were downgrading their forecasts for global growth. The corporate bond market (and others) having to take in the debacle around Wirecard’s fraudulent demise, were still functioning – and with some resilience.

Ams AG, Profine and ThyssenKrupp (to come) all in their own way herald the return of the high yield market. With that trio of players, investors showed they are prepared to absorb size and fund the lowest rated of borrowers from the high yield market. The recession is temporary. There will be casualties of the virus-related lockdowns. Volatility might pick up again. Defaults (after Wirecard) are most certainly coming.

However, money needs a home. Austria’s 100-year, 0.85% coupon effort isn’t what excites (it frightens, actually). It remains to be seen if those deals mark something of a turning point for a high yield market which was going gangbusters (primary at a record pace) before the virus shutdown. But the signs are good for a European high yield market exhibiting signs of maturity. We’re going to need equity market volatility to play ball, though.

Investors pile into Profine

In a quiet session, Aeroports de Paris was the sole IG non-financial borrower as it issued an opportunistic €1.5bn in a dual-tranche offering. The deal took in €750m in an 8.5-year at midswaps+150bp and another €750m in a 12-year at midswaps+175bp. Total books were €4.25bn and the final pricing 20bp inside the opening talk.

IG non-financial issuance for the month is now up at €43.7bn, with effectively just a couple of sessions to go in order to get the €6.3bn making it the first time we have seen three consecutive months of €50bn or more in the IG non-financial market. That’s not impossible, especially with Takeda’s jumbo deal to come.

Then we had that duo of high yield deals, with ThyssenKrupp also in the market. Profine, rated B3/B-, issued a slightly increased €340m of a 5NC2 structure priced to yield 9.25% in what was the highest fixed coupon since Kantar’s 8NC3 issue back in October 2019. Since July 2017, only Montichem’s €150m issue in September 2019 has offered a higher coupon – which was 10% for the €150m issue.

Then we had Ams AG’s €850m 5NC2 deal which was priced to yield 5.75% (also at the guidance), for the low double-B rated borrower. They added a $500m tranche as well, priced to yield 6.75% for the 5NC2 deal.

So we have have had a good €7.6bn issued in the high yield market this month. We still expect the Thyssen deal to be pried which would take the first half’s deal flow to close to €40bn.

A bit of this and a bit of that…

The penultimate session of the week was dominated by the coronavirus outbreaks across the US, although some will be keeping an eye on the Sino-Indian situation, with the latter already making decisions to move away from closer relations (economic or otherwise) with China.

Wirecard’s looming insolvency also gripped – Germany’s ‘Enron moment’, some would compare, but it’s a blow to Germany Inc and reveals a plethora of mistakes in inadequacies at the regulator Bafin.

We were light on data although that was only until the US GDP print for Q1 and durable goods numbers arrived. In the event the GDP print for Q1 came in line with expectations at -5%, but durable goods orders rose the most in any month since mid-2014, up by 15.8% in May (expectation +10.9%). The core number rose by 4% after an 8.2% drop in April.

So the economic numbers continue to improve but the markets are hesitant owing to the coronavirus outbreaks across many US states. We get the impression that there is a big rally in there somewhere, but the mood music continues to be tempered by the fear of second waves.

Equities therefore spent there session treading water. They tried to break higher, spent some time in the red and eventually closed higher taking comfort from US markets managing to trade flat, as at the time of our close. The FTSE eventually put on 0.4% and the Dax 0.7%.

In rates, the 10-year US yield is holding at around the 0.70% area, now at 0.67% (-1bp). We had a big rally in Gilts before a bit of a fade, pushing the 10-year yield down as low as 0.14% before it closed to yield 0.15% (-3bp). The Bund also rallied leaving the 10-year to yield -0.47% (-4bp).

In the synthetic market, we edged wider for choice with Main at 69.5bp (+0.7bp) and X-Over 4bp high at 397bp, reflecting the uncertainty across risk assets as those virus outbreaks are reported.

As for cash, we saw a little bit of weakness again with the iBoxx IG index thus left at B+155.5bp (+3bp). There was a widening of 22bp in the Coco index to B+725bp as the high yield index closed 10bp wider at B+540bp.

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.