27th September 2020

🗞️ Yo-yo markets here to stay

iTraxx Main

61.5bp, -0.1bp

iTraxx X-Over

362.6bp, +5.8bp

🇩🇪 10 Yr Bund

0.52%, -1bp

iBoxx Corp IG

B+130bp, +2.5bp

iBoxx Corp HY

B+493.6bp, +11bp

🇺🇸 10 Yr US T-Bond

0.66%, unchanged

🇬🇧 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″]

Plenty to ponder…

There’s a wall of worry in front of us. The pandemic, lockdowns, the US election, social unrest across the US, uncertain macro, no visibility on the short-term economic outlook and the upcoming earnings season all represent reason for concern. Time to reduce risk, park up in cash and live to fight another day.

The problem is that some or all of the aforementioned can change, and quickly. We might get news or wind of a viable vaccine that will get markets rallying. There just might be a definitive US election result (the first debate this week will possibly give us a clue) and we can argue whether a Trump or Biden administration will be better for markets. What is a sure thing, though, is that there is going to be some sort of central bank action, soon.

In credit, reducing risk could be costly. Cash is very expensive. Hopping out of the market, only to look to re-enter at a later stage is usually always costly. Liquidity in secondary is poor. When the going improves, it gets worse as the offered side completely fades. Chancing one’s luck in primary is usually the only way back in, and we know full well that competition is fierce and allocations reduced.

We might be about to hit a record year for issuance in HY and IG corporate bond markets, but that doesn’t mean it has been any easier to get some bonds on the books. Demand has been massive as cash has poured into the corporate bond market this year. The record run rate of supply has only satiated the demand. There is little left over.

It’s been hit and miss since we returned after the summer break the primary front. Yet we have had an excellent month so far with €39bn of IG non-financial issuance – the second-best September since 2014 – and €9bn behind last year’s total.

Even the high yield market, which has no right to be so flush with deals given the macro backdrop and heightened levels of fear, has had a good month with €8bn issued as it also heads for a record year for issuance.

So, the signals are mixed. There’s cash to put to work. Holding cash is expensive. Credit benefits from being a safe-ish haven market, with corporate debt burdens supported by cheap funding levels which has seen them get through the crisis so far with limited event risk. We all know a zombie-like narrative is going to dominate the headlines at some stage, but for now, investors are choosing to ignore it. Excess liquidity benefits all.

Better close, looking for a decent open

We at least might be able to get off on a positive note this week, after the gains in the US on Friday which mostly came after the close in Europe. The S&P ended up 1.6% and the Nasdaq added 2.26%. In Europe, the FTSE added 0.3% while the Dax lost 1.1%, the latter’s fall mostly coming after a poor durable goods print in the US. Rates didn’t do too much as the lacklustre session petered out.

In credit, there was no Friday primary market flourish. Nevertheless, as stated above it’s been a decent month and we are just €2.5bn away from reaching an annual record. A flurry of deals on before the close of business for the quarter on Wednesday will do it.

So, the week passed was a weaker one for credit, as it followed in the nervous footsteps of the equity markets. We were not spared any weakness as we have been, although the widening was relatively modest. The iBoxx IG cash index moved 2.5bp wider on Friday or 6bp in the week leaving it at the widest level for the month.

The higher beta markets were more under pressure, not helped by the extreme levels of illiquidity. The high yield index moved 11bp wider and was up at B+493.6bp, representing weakness of 34bp so far for September. And the CoCo index was marked 19bp wider on Friday, or 60bp weaker in the week, at B+702bp.

It’s ‘squeaky bum time’ in some respects. There’s much to ponder. Most of the volatility and any market weakness will be felt primarily in equities, but higher beta credit risk will also feel the pinch. Credit investors will contemplate positions, whether they are too long credit risk and so on – although we think duration concerns are overdone. Will positions and attitudes necessarily change? We don’t think so.

As for this week, there will be some concern that the US sanctioned SMIC, China’s largest chipmaker, meaning that companies will need a licence to export (software and chipmaking) products to SMIC. And then there was that Swiss referendum on Sunday (result not known at the time of writing) on whether to maintain the existing freedom of movement arrangements. There might be consequences for Swiss/EU trade. And of course, the EU has much more on its plate as the final round of talks resume this week before the mid-October bid EU summit.

Elsewhere, there is a host of flash CPIs for the Eurozone, we have UK final GDP for Q2 and global manufacturing PMIs for September. We round off with the big September non-farm payroll report, with markets looking for 850,000 job additions and the unemployment rate to drop to 8.2% (8.4% August).

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.