5th March 2020

🗞️ Yo-yo market losing its way

iTraxx Main

67.8bp, +3.8bp

iTraxx X-Over

317.3bp, +25.5bp

🇩🇪 10 Yr Bund

-0.69%, -6bp

iBoxx Corp IG

B+129bp, +2bp

iBoxx Corp HY

B+431bp, +14bp

🇺🇸 10 Yr US T-Bond

0.91%, -8bp

🇬🇧 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″]

Be careful out there…

US rate-cut suspicions aside, we had the classic market response to the US stimulus with investors subsequently looking for the ECB and BoE to follow suit. Equities did what they only can do – rise sharply as more and cheaper liquidity was anticipated, before succumbing to the headlines and renewed fear. There’s always tomorrow.

Markets are in short-term thinking mode and a cut from those other central banks might offer a reprieve – for a day or two. It’s clearly become a real traders environment amid the volatility, as nobody really knows where this is all going.

The Fed must have thought ‘job done’ for now as the rate cut got the perfect response earlier this week.  But with the markets expecting more, they will need to blink again and might do as early as the next FOMC. As for the EU, it needs to think outside the box, and allow for some leniency of the Maastricht fiscal rules.

Rates in the meantime have been better bid, leaving benchmark yields achieving fresh record lows in in both the US and UK, while we aren’t too far away from that being the case in the Bund curve.

Credit spreads have moved lock-step with equities. Tighter because of the huge rally in equities driving an illiquid secondary credit market. And then wider when equities have sold off. The exaggerated movements in the AT1 market, for example, is a function of the secondary market’s illiquidity and the vagaries of the product.

Real money, though, is broadly sidelined while the whipsawing in spreads is illustrative of the lack volumes being transacted.

Where real money is still getting involved – and in a big way, is when it concerns primary – and where new issue premiums are wide enough.

We’ve had deals and investors are not showing any nerves about piling in. That’s to be expected because a deal is only coming if there is a good chance of success. And of course, investors are better off in IG credit than in cash, where rates are falling fast.

For borrowers, opportunism is the name of this game. And if they put a deal on the screens in these testy climes, it needs to work because no borrower wants to be sitting on a failed transaction.

Weaker today, who knows tomorrow

Another weak session and the markets are not moving in halves. Equities are moving up or down by 2%+ a session – and have been for over a week! On Thursday, for most of the session it was the turn of the 2% drop, but European bourses managed to close off their worst levels for the day – by around 1.6% lower. Volatile US equity markets were down by 3%, as at the time of writing.

In rates, it was another bid-only session where new 10-year Gilt yield visited a fresh record low before closing at 0.33% (-4bp). We saw -0.69% (-6bp) on the 10-year yield and around the record low on the 10-year US Treasury again, yielding 0.91% (-8bp) at the time of writing. Gold has also been in demand and creeping higher, now at a recent high of $1,667 per ounce (+$24).

It’s been a decent week in primary credit amid all the volatility, with nimble borrowers and receptive investors suggesting that credit markets – in IG anyway – are not fazed by the looming macro downturn and broad asset price weakness/volatility. With Vattenfall printing €500m on Thursday, they added to the €5.5bn already printed this week, leaving IG non-financial issuance up at from €6bn from six borrowers (11 tranches).

The Swedish utility printed at midswaps+45bp for the long 5-year green bond off books at €3.5bn nd lopped 30bp off the initial talk. That was in line with what we saw in the other deals this week, with books up to 9x subscribed and pricing rammed tighter by 20-30bp as a matter of course.

We’re very unlikely to be getting a deal on Friday, as we look forward to the non-farm report.  There isn’t likely going to be much of a surprise in the February number (that will come in an unpredictable March one), with the US looking to have added 175,000 jobs.

The credit indices retreated as protection costs jumped. Again. iTraxx Main rose by 3.8bp to 67.8bp and X-Over jumped by 25.5bp to 317.3bp.

In cash, obviously it was another weak day, and the market in secondary is barely functioning. IG spreads, as measured by the iBoxx index, moved 2bp wider to B+129bp and the high beta AT1 index was 25bp wider at B+472bp – but that was after a 40bp recovery over two session prior.

As we might expect with a recession a nailed on certainty across Europe at least and the markets volatile and weaker during a difficult day, the high yield index was wider, by 14bp and left at B+431bp. That is still inside last week’s closing recent wide (B+438bp). The weekend can’t come quickly enough.

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.