8th June 2020

🐗 Yield hogs pile in

iTraxx Main

60.5bp, +1.2bp

iTraxx X-Over

336.5bp, -6.2bp

🇩🇪 10 Yr Bund

-0.32%, -5bp

iBoxx Corp IG

B+135bp, -4bp

iBoxx Corp HY

B+484bp, -8bp

🇺🇸 10 Yr US T-Bond

0.87%, -3bp

🇬🇧 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″]

Rally sparks AT1 primary into life…

The credit markets’ rally over the past few weeks sparked the corporate hybrid sector back into life. Yield was the story in the session. We had two AT1 issues after an absence of several months and a non-financial hybrid thrown into the pot for good measure. Why not? After all, the rally has seen the AT1 (iBoxx) index widen from a B+330bp pre-Covid level to its record wide B+1500bp by mid-March, and back to B+585bp now.

The going must be good. There has been little regulatory dissent around coupon deferrals. The financial system hasn’t necessarily been the one making the headlines this crisis. That’s possibly all for another time. Right now, the improved market tone and investor confidence is feeding the high/low beta compression trade. Borrowers are taking note, investors are piling in.

And all that came after the shock record contraction German industry in May as it recorded an unprecedented 18% fall in production in March, month on month. Mind, that data is a little ‘out of date’ now and there has been much stimulus since.

That did come after overnight we had Chinese exports and imports drop by 3.3% and 16.7% in May, respectively, suggesting the global recovery might be more laboured than what the markets are currently pricing in.

Anyway, risk pricing was a little mixed as markets absorbed it all. The Dax laboured, relatively, but after the week German equities have just had, few will quibble. Secondary credit also had a steadier day as investors eyed up those primary deals offering up some enticing coupons. Clip, clip, clip.

Day of the hybrids

The pricing fun and games aside, we would concede that there was an element of price discovery in the process for the AT1 deals in the session. No fear going forward, we all now are aware that there is a tremendous bid for paper.

ABN attracted a €10bn+ order book for its €1bn PNC5.25 4.375% AT1 offering where the final pricing was 87.5bp inside the initial gambit. Commerzbank saw orders of €9.25bn for its €1.25bn PNC5.3 variable AT1 transaction, with the final offer yield of 6.125% also some 87.5bp inside the initial talk. Together, these deals will be good news for the sector and might flush out other banks looking to get this type of funding away over the next few weeks.

The other financial offering in the session came from Societe Generale, as it issued €1bn in a 10-year senior non-preferred at midswaps+135bp (-25bp versus IPT, books €2.6bn).

The hybrid action didn’t stop with those offerings listed above, as Deutsche Boerse issued a 27NC7 hybrid for €600m priced to yield 1.25%, or -62.5bp versus IPT. Books exceed €5bn.

And then there was a littering of IG non-financial offerings, much to be expected. Surprisingly, OMV got an order for almost €8bn for its dual-tranche deal. They issued €750m in a 3-year at midswaps+45bp (-40bp versus IPT) and €750m in a 10-year at midswaps+85bp (-45bp versus IPT). Veolia saw interest of €3bn for its long 11-year offering, issuing €500m at midswaps+78bp which was 42bp inside the initial talk.

Spanish construction group ACS issued a much-increased €750m, 5-year deal at midswaps+165bp which was -35bp versus IPT, with books at only €1.75bn. This deal might not be a great performer. So, a week in, and June has already seen €10.9 bn of IG non-financial issuance….and we are on course for €30bn+

Finally, a pure high yield play came in the form of €500m from Virgin Media, which was due to price a 10NC5 structure to yield around 3.75%.

Credit still rallying

A slightly choppy market with equities small up and down eventually ended with European markets slightly in the red. The US equity market though was the one to watch with the S&P just 10 points (less than 0.5%) away from being flat year to date, as at the time of writing.

The news took in Spain’s central bank forecast for Q2 GDP declining by up to 22%, and by 15% for 2020. There was plenty of news on job cuts (Mulberry, BP) while the French crisis jobs scheme could see some getting support for up to 2-years!

Rates were better bid, last week’s moves possibly overdone into the equity rally. 10-year yields on the Bund moved to -0.32% (-5bp), on the Treasury to 0.88% (-3bp) and the Gilt moved to yield 0.33% (-2bp).

In credit, S&P’s latest default outlook suggested that the European default rate could more than treble to 8.5% by March 2021, or to 11.5% on a worst-case scenario. Their bottom of the range was for the rate to rise to 3.5%. So they have left much wriggle room (!), clearly finding it difficult to factor in the extensive monetary and fiscal profligacy.

iTraxx Main edged 1.2bp higher to 60.5bp and X-Over edged 6.2bp lower to 336.5bp, the ratio declining to 5.56x leaving a bit of compression between them.

In the cash market, it all went tighter. The IG iBoxx index moved to B+135bp (-4bp) which means that this index is already 40bp tighter in a week! And over 120bp tighter than the wides seen in late March. Even with the deals, the tone was positive in the CoCo market and we saw more tightening in the AT1 index, now at B+585bp (-15bp).

The high yield market is also grinding out some performance, the index left at B+484bp at the close (-8bp) – a stunning 92bp tighter this month already!

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.