5th January 2021

🇺🇸 US Senate vote up in the air

iTraxx Main

49.3bp, +1.9bp

iTraxx X-Over

257.5bp, +11.7bp

🇩🇪 10 Yr Bund

-0.58%, +2bp

iBoxx Corp IG

B+100bp, -0.5bp

iBoxx Corp HY

B+354bp, -2bp

🇺🇸 10 Yr US T-Bond

0.96%, +4bp

🇬🇧 FTSE 100

6,612, +40

🇩🇪 DAX

13,651, -76

🇺🇸 S&P 500

3,736, +35

It’s all about control…

Trump is throwing is toys out of the pram, and will eventually be wheeled away. Biden wants total control, the Republicans need a result to pursue a blocking agenda. We have the Georgia upper house election Tuesday, where the result will go a long way in determining the particular dynamics of the US economy over the next few years. Judging by the hesitancy across the markets, it would appear that the State election has been holding back investors during these opening New Year skirmishes. Nevertheless, it is promising thereafter, hopefully unleashing a more bullish trajectory for risk assets.

The pandemic pendulum is currently residing in the ‘danger’ zone and it isn’t going to move away from it anytime soon. That is, we can write off Q1 from a macro perspective. Government and central bank support measures will stay in place – and increased/added to where necessary. The inevitable ‘debt write off’ calls will be made (to little avail). We can worry about the possible inflationary consequences in 2022 or 2023.

Asset markets will be sustained thus just as they were through the second half of 2020, with cheap and plentiful levels of central bank-provided liquidity. And investors will buy into the narrative that once we have a good hold in containing the virus’ spread, macro is going to exhibit a very sharp recovery – initially.

In credit, the intraday spread direction will be impacted only by big moves in equities. Otherwise, spreads are going tighter. There is little doubt about that – and can only be derailed by fresh event risk. Spreads are heading towards record tight levels in the midst of a pandemic and a depressed near-term economic outlook.

What’s more, we’re going to see compression between high and low beta corporate bond risk, illustrating clearly the need for yield. Plug into it.

Primary activity ratcheting up

Primary was busier, but we only had one IG non-financial corporate again. This time the deal came courtesy of Alstom, with the borrower lifting €750m in an 8-year maturity at midswaps+50bp. The €4bn+ book saw final pricing 35bp inside the initial guidance. VW Leasing went the triple-tranche route, with 2.5-year, 5-year and 8-year maturity offerings of €1bn, €750m and €750m, respectively. They were priced at midswaps+55bp (-30bp versus IPT), midswaps+75bp (-30bp) and midswaps+93bp (-32bp), respectively.

Wessex Water opened the sterling corporate market for 2021, with £300m printed in a 15-year at G+85bp (-25bp versus IPT, books €1.4bn).

The rest of the corporate activity was in the financial and REIT sectors. SocGen issued €1bn in a long 8NC7 senior non-preferred issue at midswaps+95bp, which was 20bp inside the initial guidance. BPCE issued a 6-year for €750m at midswap+48bp (-12bp versus IPT) and a 12-year for €1.25bn at midswaps+60bp (-15bp versus IPT), on combined books in excess of €2.5bn. Swedbank took €750m in a 7-year senior non-preferred at midswaps+63bp (-17bp versus IPT).

In the real estate sector, Digital Realty issued a 10.5-year green deal for €1bn at midswaps+93bp (-22bp versus IPT) with books in excess of €2.1bn. Grand City Properties issued €1bn in a 7-year priced at midswaps+80bp (-30bp versus IPT, books €2.6bn).

And we had Berkshire Hathaway issue an upsized €600m at midswaps+65bp, for a 20-year maturity offering. Other deals of note saw Ireland issue €5.5bn of a long 10-year at midswaps-2bp – off a €40bn book, and Italy €10bn of a March 2037 at BTPs+8bp (€105bn of interest).

US ISM saves the day

A difficult session was rescued by the ISM manufacturing print in the US for December which came in at 60.7 versus expectations of 56.6 – and at the strongest pace for a couple of years. Equities had languished before that, focused almost completely on the Georgia election and Trump’s shenanigans.

The FTSE added another 0.6% and outperformed again in Europe, the DAX was off 0.6% and, as at the European close, US equities only marginally higher.

However, later into the session, the S&P was 1% higher and the Nasdaq up by the same amount – dispelling whatever fears investors might have had on politics and the pandemic. Crypto was also back in favour following a couple of days of nursing some big losses, with Bitcoin back up at over $34,000 a coin (at the time of writing).

There was some weakness in rates. The 10-year Gilt yield rose to o.22% (+4bp), the Bund yield to 0.58% (+2bp) and the Treasury was yielding 0.96% (+4bp).

The weakness across European equities fed into credit protection market, with iTraxx Main rising by 1.9bp and X-Over by 11.7bp to 257.5bp.

Cash was a touch tighter with the iBoxx IG index at B+100bp (-0.5bp) and we think most likely tighter again on Wednesday given the rally in US equities which will feed into a better open on Wednesday in Europe. There wasn’t much doing in secondary, leaving the HY index at B+354bp (-2bp) and the At1 index unchanged at B+444bp.

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.