4th January 2021

🗞️ We Should All Have Georgia On Our Minds

iTraxx Main

47.4bp, -0.6bp

iTraxx X-Over

245.8bp, +3bp

🇩🇪 10 Yr Bund

-0.59%, -1bp

iBoxx Corp IG

B+100.5bp, -0.4bp

iBoxx Corp HY

B+356bp, -2bp

🇺🇸 10 Yr US T-Bond

0.91%, unchanged

🇬🇧 FTSE 100

6,574, +113

🇩🇪 DAX

13,731, +12

🇺🇸 S&P 500

3,701, -55

Not sure it makes much difference, near term…

Georgia matters. That’s because who ultimately controls the summit will determine the direction for markets over the medium term. There are two seats being contested, and if the Democrats take them, they will have control of both houses and be able to push through their $3trn stimulus package – and raise taxes, hard. If Republicans hold them, we stay as we are. Either way, we will get a short term boost (from infrastructure spending mainly).

We need to get through the week, though, before the dust settles. There is the small issue of Friday’s non-farm payroll report (100k consensus, 245k previous) – and all the clues that go with the print in terms of assessing the shape of the US economy. We are set up for a potentially nervous opening few days of the year.

If the Democrats get over the line in Georgia, Bitcoin will likely go through the roof. The new administration will be printing dollars – which will be going out of fashion (inflation expectations and rates higher), and give every excuse for a shift into crypto’s ‘store of value’ trade. With improvements in economic growth to come, we will see equities higher and credit spreads tighter.

If the Democrats fall short in Georgia, we get the same effect on asset prices, but the appreciation in them will just be a little slower. A little more laborious possibly, but there are still positive undertones for markets.

Generally, there is every reason to be upbeat even amid any volatility/weakness that we might experience early on. We’re still targeting record tight credit spreads in IG and HY, a 25% reduction in IG issuance (although that is still at high levels) and returns of as much as 7.8% in high yield as higher beta risk outperforms.

BMW opens up primary, as is usually the case

The German automaker is usually there or thereabouts, in the mix as one of the first companies getting its primary issuance away. They were at it again on Monday. There does seem to be a decent pipeline in the works and we can expect busier sessions as the week progresses – especially if the current bullish mood persists, as is likely.

BMW issued €1bn of a 5-year at midswaps+37bp and €500m of a 12-year at midswaps+45bp, which were 28-30bp inside the initial price talk. Combined books came in at over €7.3bn. It’s clear that last year’s trend – taking in huge subscriptions for deals and ramming pricing tighter – shows no sign of letting up.

Lest we need reminding, the lack of a juicy coupon – or just absent one. The 5-year coupon was zero and on the 12-year barely much more (0.2%). Mind, these deals look cheap when compared to cash parked in a custodian account at -0.8% or less.

The other deal came from ING Groep which issued €1.5bn of a senior 9NC8 priced at midswaps+70bp, which was 20bp inside the initial guidance.

Start as we mean to go on

Well, it was a very mixed start to the year. The first economic data points were encouraging, but it likely won’t last. Manufacturing PMIs across the Eurozone all showed that the region had returned to growth in December – albeit to varying degrees across the individual nations. Most national PMI prints missed expectations, but broad manufacturing expansion in the month was the key.

The big figure for the Eurozone was 55.2 (53.8 previously) against expectations of 55.5. Germany and the Netherlands recorded the strongest levels of activity/recovery dynamics.

Equities were volatile and eventually danced to the tune of the US markets, and a great start soon faded. Still, the FTSE was the equity markets’ winner in the session. Its 1.7% rise versus say unchanged for the DAX might be a harbinger of things to come for the UK market, with it being the principal outperformer in 2021. All indices were significantly higher earlier in the session.

UK equities lagged by a huge margin in 2020 but vaccine rollouts, a Brexit deal and perhaps a broad economic recovery should boost sentiment towards the UK’s internationally-focused FTSE stocks.

US markets opened brightly but faded the initial gains to trade up to 1.8% lower, as at the European close. There is unlikely going to be much here until after we get some sort of result from the Georgia election. Although Trump is in deep trouble and scandal beckons following recordings of him trying to strong-arm additional votes to overturn the Georgia presidential election result.

Rates endured a choppy session but ended better bid. The 10-year Bund yield declined further to -0.61% (-3bp), the Gilt yield on the equivalent maturity was 2bp lower at 0.18%. In the US, the yield on the Treasury was unchanged at 0.91% (10-year).

That move in rate markets goes against the grain of ‘risk-on for 2021’, but talk of the coronavirus vaccine potentially being ineffective of a South African variant of the virus and the potential for more lockdowns might sustain a better bid for safe-havens (through Q1). On the virus news, it was rather grim.

In credit index, Main edged lower to 47.4bp (-0.6bp) and X-Over moved a touch higher to 245.8bp (+3bp).

In the cash market, little flow and volume as we would expect but enough positive sentiment across Europe to see us a touch better bid. The iBoxx IG cash index closed the opening session at B+100.5bp (-0.4bp), we saw 12bp of tightening in the AT1 index (B+443bp) and the HY market was effectively unchanged (index at B+356bp, -2bp). The sterling market has a good squeeze on it, the index at G+119bp (-2bp).

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.