13th December 2020

🇬🇧 Time to say Goodbye

iTraxx Main

48.1bp, unch

iTraxx X-Over

250.2bp, unch

🇩🇪 10 Yr Bund

-0.64%, -4bp

iBoxx Corp IG

B+102.5bp, -1bp

iBoxx Corp HY

B+365bp, +7bp

🇺🇸 10 Yr US T-Bond

0.89%, -2bp

🇬🇧 FTSE 100

6,547, -53

🇩🇪 DAX

13,114, -181

🇺🇸 S&P 500

3,663, -5

And G’day, Cobber…

It’s clear that the EU isn’t going – nor has ever looked, to play ball. Neither willing nor able, the organisation’s latest stance and interim offer to the UK reeks of punishment – as suggested by PM Johnson. The penny must finally have dropped for the UK government, needing to become a rule-taker for a deal. And so Australia, that ol’ chestnut, it must be.

Not that the markets have necessarily yet reacted in so-called horror of a no-deal Brexit, judging by the relatively muted reaction (equities just 1% – 1.5% lower, sterling -0.6%) at the end of last week. Maybe investors hold out hope that a deal at the very last minute is still possible. Either way, it seems priced in.

The other potential news item of interest is that surely it is only a matter of time now, that 10-year Italian BTPs join other the Eurozone peripheral countries aka Spain and Portugal where the yield, currently at 0.50%, falls into negative territory. Who would have thought!?

The coronavirus macro recovery dynamic is going to be slow and arduous. The ECB has been forced to act again, is committed to buying even more debt (extending and reinvesting), and clearly financing deficits – which it is not supposedly allowed to do. But turning a blind eye and/or riding roughshod over the rules, in extremis, has always been an EU/Eurozone trait. The central bank is effectively bailing out insolvent Club Med countries.

So that BTP 10-year yield has just 50bp more to go. Their curve is already in negative yield territory to 5-years. It’s small wonder that corporate bonds have been so well bid. And faced with the prospect of paying to hold even previously labelled ‘toxic’ peripheral debt will only boost corporate bond markets.

We think Italian 10-year yields will head into negative territory, that asset bubbles will continue to inflate and investors should play into that trade. The time for a reckoning isn’t even close. Should BTPs head to 0%, then we would think that the Bund yield in the 10-year will be retesting its own record low of -0.91% (-0.64% now).

Compression between high and low beta corporate bond spreads is going to be the driver for the opening quarter or two of 2021. Investors scurrying for paper into an expectant macro recovery through 2021 will be adding almost desperately come January. Primary should open with a flourish, paper gorged upon and confidence helping IG spreads through to new record levels.

Primary has delivered its fill

So we’re at the end of the serious business side of the year and primary has effectively come to a close, save for a few high yield issues. In fact, we have a decent flurry of activity in that market, with issuance now up at a massive €87.7bn for the year so far.

That’s a huge €11bn ahead of last year’s record and completely unexpected, especially after seeing barely an issue through March and April. The pandemic, lower yields, covenant waivers and so on have been kind to the high yield market.

That might change in 2021, but likely it will not. Judging by the receptivity to deals in Q4, we would think that investors are anticipating more of the same and some solid performance, as spreads recover while underlying yields remain anchored or even go lower.

IG non-financial markets look to have drawn to a close, though. We will possibly get the odd opportunistic borrower this week in the market, coming largely unopposed and should quite easily be able to get a deal away. December’s issuance has been very low, at just €3.35bn but after a stunning record-breaking 2020, few will grumble that they haven’t had enough deal flow to contend with.

€359bn has been issued in this market, some €40bn more than last year’s previous record. Don’t expect a repeat of that in 2021.

Time finally slips away

There was a better bid for safe havens in last week’s final session and we might see that continue through to year-end if, indeed, the UK calls off the trade talks. Given that the EU seems happy enough to keep the door open, the onus is on the UK and, hopefully, they won’t disappoint. If only, so we can all get in with it.

The 10-year Gilt yield is back down at 0.16% representing a drop of over 50% in the yield in just a week. The Bund similarly rallied to yield -0.64% (-4bp) and the US Treasury yield fell to 0.89% (-2bp).

In equities, the Dow at least managed to close above 30,000 and in the black for the session, but all other markets were lower. News that the US has approved the Pfizer/BioNTech vaccine might possibly help to push markets higher at the beginning of this week.

The Brexit jitters for once infiltrated the credit markets and we did see a slight weakness in spreads, the iBoxx IG index up at B+102.5bp (-1bp). That won’t worry anyone just as total returns in IG (iBoxx) for the year to date hit 3.0% boosted by the rally in the underlying.

Similarly, we saw moderate weakness in high yield markets, leaving the index at B+365bp (+7bp) and the first noticeable move wider in this market for over a month. Returns for the year to date are at +1.7%.

So we go into this week with activity to drain away further and the focus will squarely be Brexit. And US politics ought to take a back seat after the Supreme Court rejected Texas’ bid to challenge the election result. For anyone in any doubt, Biden’s in.

For anyone in need of a distraction from politics, there is the FOMC to look forward to, while the central banks in Japan and UK will also meet. On the data front, we have US and Chinese industrial production and retail sales. There are the UK unemployment rate and inflation data. And we have a whole host of flash PMIs which will give investors a good indication about the state of play across global macro.

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.