16th January 2020

🗞️ 2020’s credit outlook brightening

MARKET CLOSE:
iTraxx Main

43.3bp, -0.3bp

iTraxx X-Over

207.8bp, -1.7bp

🇩🇪 10 Yr Bund

-0.22%, -1.5bp

iBoxx Corp IG

B+104.8bp, -0.7bp

iBoxx Corp HY

B+338.6bp, -2bp

🇺🇸 10 Yr US T-Bond

1.81%, +2.5bp

🇬🇧 FTSE 100

7042.47, (+0.35%)
🇩🇪 DAX

12774.88, (-0.12%)
🇺🇸 S&P 500

3116.39, (+0.32%)

Financials and high beta credit hold the aces…

Given the solid start to the banking sector’s Q4 reporting season, it does appear that we are potentially set up for the financial sector to lead the rally in stocks and credit in 2020. That’s certainly how investors in credit are looking at it, with financials and high beta credit likely to deliver most of the performance this year. What’s to stop the juggernaut?

The ECB is active in the market, investors have high cash balances. Trump is being impeached and the markets have barely reacted while the previous Middle East tensions have also been shrugged off. Brexit is now old news. US stocks are hitting record highs almost daily, now up through 3,300 for the S&P.

So it is difficult not to be positive on credit and this dynamic seems like it will persist. How much of an ask is it, really, to think that we can revisit record lows in AT1 index spreads/yields? They were seen in January 2018, with the iBoxx index spread at B+287bp and the yield at 2.81%, which compares with B+376bp and 3.29%, respectively, now. We’re less than 100bp in spread and 50bp in yield away, so it is eminently likely we get there in this bid-only sector.

While we’re at it, what about iTraxx Main at 37bp and X-Over at 180bp at some stage? Anything more than that in X-Over and we will be looking at some serious compression between the two versus current metrics.

Even IG financials have already exhibited some outperformance during these early skirmishes – despite the high level of senior issuance, versus IG non-financials. The action, though, is in the CoCo market and the demand for AT1 risk remains elevated (as witnessed in primary).

Should the current momentum be maintained – as is likely, then we are going to rapidly approach those record tights/low yields of 2018. Credit fundamentals, after all, also remain supportive as the banking sector continues to recover albeit against a back drop of low rates and uncertain macro.


Financials still dominate in primary

Financial issuance was once again in the ascendancy with Mediobanca pulling the trigger on a €500m no grow, long 5-year senior non-preferred priced at midswaps+130bp, with books in excess of €4bn and final pricing some 30bp inside the initial talk.

Goldman Sachs issued €1.75bn in a 3.25-year floater at Euribor+55bp and €1.25bn in a 10-year fixed at midswaps+85bp. The Q4 results miss by the bank on Wednesday didn’t noticeably affect demand for the deal, with books coming in at over €6bn and final pricing 15bp inside the opening guidance.

And, keeping up with the recent daily issuance trend, we also had a subordinated offering, as Ibercaja Banco issued in Tier 2 format, out with a €500m, 10.5NC5.5 maturity issue priced to yield 2.75% (-37.5bp inside IPT). Elsewhere, the triple-A rated New York Global Life issued €800m in a 7-year at midswaps+37bp (-18bp versus IOT).

Those deals have taken the senior financials issuance to €20.25+Goldmans and to the best January since 2016. The next target is January 2014’s €32bn while we think the 2015 level of €42bn is probably out of reach.

The only deal in IG non-financials was Eni’s 10-year offering for €1bn which priced at midswaps+50bp. The demand for the deal was up at €3bn and the final pricing was 25bp inside the initial guidance.

As we highlighted in Wednesday’s comment, issuance from IG rated non-financials has been lighter than expected of late. This week has seen just €3.05bn printed and just €14.3bn at the half way stage of the month. Our expectations of €35bn look a little too bullish and we might need to pare that back to around the €30bn level.

There was a high yield offering in the session which came from French technology provider Quadient. They issued an increased €325m of a 5-year which was priced to yield 2.375% on books of almost €700m.


US equities set more records

With Morgan Stanley bringing up the rear in the Wall Street banks’ earnings, we finished on a high note as the bank reported record revenues and earnings with investment banking earnings again delivering high levels of growth.

Otherwise, we were a bit light on data in the session where the focus was on US retail sales coming in line with expectations for December, rising by 0.3%. In addition the Philly Fed business index survey rose to 17, versus forecasts of around 4 suggesting the potential for a rebound in manufacturing activity.

Most European equity markets spent the session the red but managed to close flattish, but there was no stopping that relentless rise and record breaking activity in US markets. That S&P index was through 3,300 as at the time of writing, while the Dow was comfortably nestled above 2,900 as record intraday highs were again printed (in the Nasdaq too).

In rates, the bid for Gilts remained firm, leaving the 10-year yield at 0.64% (-1.5bp) with a similar move in the Bund leaving it yielding -0.22% at the close. US Treasuries were better offered with the 10-year yielding 1.81% (+2.5bp), as at the time of writing.

As for credit, there is some frustration that we are not seeing enough IG non-financial issuance, but it is only pushing the demand higher into other sectors (in primary) as investors look to get their cash invested early. Nevertheless, there is little real follow through into the secondary markets and the moves we’re seeing as a result are quite limited.

As for Thursday’s moves, the market was better bid and helped to push the IG iBoxx index 0.7bp tighter to B+104.8bp, representing just a basis point of weakness this year so far in IG spreads. Going the other way, although really just noise, AT1 spreads edged to B+378bp (+2bp) just as HY spreads edged 2bp tighter to B+338bp. Sterling spreads were tighter for choice in a lacklustre session.

Have a good day.

Suki Mann

A 25-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 Credit Market Daily.