6th May 2020

⚡ The Power of the Dark Side

iTraxx Main

85.9bp, +1bp

iTraxx X-Over

520bp, +12bp

🇩🇪 10 Yr Bund

0.51%, +7bp

iBoxx Corp IG

B+195bp, unchanged

iBoxx Corp HY

B+662bp, -6bp

🇺🇸 10 Yr US T-Bond

0.72%, +6bp

🇬🇧 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″]

It can dominate your destiny…

The screens were awash with deals. Surely we’re not looking at breaking the monthly record for IG non-financial deals, which stands at €57bn, again? The deal flow smacks of desperation. But it could be, that CEOs and the like have looked at the outlook (order books, forward orders) – added in whatever they can about the outlook for macro – and decided that it’s grim. Desperation.

So, better to play it safe. Get the liquidity on board. The rainy day has come. The recovery is going to be laboured and extremely uncertain if we believe that the potential for second virus outbreaks are real and that further lockdowns are coming. For sure, the next set of stimulus packages are going to be less effective and for sure, less generous.

That’s the dark side. It doesn’t necessarily beckon. We’re just trying to make sense of the capital markets supply dynamics which have issuance levels running at record levels – and we don’t yet have a systemic financial crisis (unlike in 2008/2009).

Investors aren’t shying away from a gift horse presented to them. They are being presented by deals from hitherto solid companies, well-known names, perhaps even too big to fail, good ratings and usually well-tested business models.

Add in the levels on offer – not seen for several years as well as the performance of the deals on the break, then what’s not to like. Apart from the shrinking new issue premiums!

Primary is the focus, as usual

Another day and we were again flush with deals across the board – IG, HY, sovereign, senior financials and subordinated financials. Something there for everyone.

In IG non-financials, Swisscom took €500m in a green 8.5-year at midswaps+65bp (-45bp versus IPT) with a book in excess of €7bn. Eurogrid issued €750m in a 12-year at midswaps+115bp (-40bp versus IPT) off interest pitched at €4.5bn. Cofiroute took an increased €950m in an 11-year maturity at midswaps+110bp which was 45bp inside the opening talk, off a book at €3.6bn.

And then we had Nestlé. They issued €2.5bn in a 3-tranche effort. They took €650m in a 4.5-year at midswaps+30p, €850m in a 7.5-year at midswaps+43bp and €1bn in a 12-year at midswaps+57bp. The deals were priced 30-33bp inside the initial chatter across the tranches with the combined book above €8bn. With still one session to go this week (Friday, VE Day Bank Holiday in the UK), the first week of May has so far seen €9.4bn printed.

Shifting to the high yield market, Nokia issued €500m in a 5-year at midswaps+275bp and another €500m in an 8-year maturity at midswaps+335bp. The books for the deals were up at €6.2bn and despite being rated Ba2/BB+/BBB-, most of the interest would have been from typical IG investors. The last time Eurofins Scientific came with a hybrid, this time, it was €600m in a bullet long 6-year priced to yield 3.875% (books €1.4bn). That’s already €1.8bn issued this month alone in this market, and almost €3bn since Verisure reopened the market in mid-April – after a near 2-month hiatus.

In senior financials, Erste issued €750m in a 7-year maturity senior preferred at midswaps+115bp (-30bp versus IPT) and Nordea took €1.25bn in a 7-year as well and also in a senior preferred at midswaps+85bp (-25bp versus IPT). In sterling, RBS issued £1bn in a 10.25NC5 Tier 2 at G+355bp (-45bp versus IPT). CPI Property Group issued €750m in a 6-year green bond at midswaps+345bp (-35bp versus IPT).

Finishing off in the sovereign space, Germany issued its first syndicated bond in 5 years for €7.5bn at B+22bp for a 15-year maturity, with orders up at over €35bn and Slovakia lifted €4bn in a dual-tranche 5-year and 12-year offering split equally between those maturities.

A crash, bang and then a whimper

Service sector activity in Spain and Italy slid to historic lows with the ISMs for April coming in at eye-waveringly low levels of 10.8 and 7.1, respectively. In France and Germany, the same picture with a 10.2 and 16.2 print for the month that saw the Eurozone’s services PMI at just 12.

Retail sales across the region declined by 11.2% in March (month on month). In the UK, construction activity fell to its lowest level on record, the PMI coming in at just 8.2. And the US private sector lost 20.2m jobs in April, with 16.7 of them coming in the services sector, which was pretty much in line with expectations. There’s going to be a lot more of data like these prints before we see the light.

There was also the initial stirring of discontent in the government bond front, as the markets were beginning to absorb the German constitutional ruling on ECB bond purchases. It drags into the fray the EU, Eurozone, the ECJ and the ECB and could potentially have a significant impact on the whole structure of those institutions.

The bund yield rose by 6bp to -0.51% and BTPs went up to yield 1.97% (+10bp). The Treasury yield rose as well to 0.72% (+6bp) while Gilts were yielding 0.23% (+3bp) at the close of business. All in the 10-year.

In equities, the FTSE closed unchanged and at the European close, US markets were also unchanged. The Dax closed 1.1% lower as other European bourses followed suit, likely on sustained euro weakness against the dollar.

That weakness in Eurozone equity markets left credit protection a touch better bid in the session (higher) and we closed with iTraxx Main up at 85.9bp (+1bp) with X-Over 12bp higher at 520bp.

Finally, in secondary cash, a quiet day but with moderate levels of weakness all being told. The IG market was better offered, for choice, although the index closed unchanged at B+195bp. We saw the same in the AT1 market with the HY index left at B+662bp (-6bp).

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.