11th March 2020

🗞️ Why Shock and Awe gives the UK every chance

MARKET CLOSE:
iTraxx Main

103bp, +2.2bp

iTraxx X-Over

476bp, +16.4bp

🇩🇪 10 Yr Bund

-0.75%, +5bp

iBoxx Corp IG

B+170bp, +1bp

iBoxx Corp HY

B+570bp, +28bp

🇺🇸 10 Yr US T-Bond

0.81%, +6bp

🇬🇧 FTSE 100 6090.04, (-1.55%) 🇩🇪 DAX 12901.34, (-0.71%) 🇺🇸 S&P 500 3372.85, (+0.12%)

ECB/EU needs to dish out the same…

The proactive 50bp cut by the BoE, seen in their eyes as the financial system being part of the Covid-19 solution, took markets by surprise. At the same time, it has suddenly heaped additional pressure on the ECB, and Lagarde & Co will need to be as decisive.

The financial measures are not a cure for the Covid-19 virus pandemic but are in place to limit the negative effects of the economic impact and give rise to hopes of a V-shaped recovery – when it comes.

So this is not the time for the ECB to be tinkering around the edges with a paltry move of, say, a 10bp or even 20bp rate cut. Admittedly, the rate cuts are in part about keeping the markets ‘happy’ because small businesses and the like across Europe have long been struggling, for reasons not tackled from the 2008 crisis. Europe has never really recovered.

However, a confidence-boosting 25bp cut (or more) along with other, broader measures to get credit flowing through the Eurozone’s financial system quickly are recognised as being of the utmost urgency.

Thus a coordinated effort with the EU, allowing for a fiscal boost would add to and play into the broader ‘kitchen-sinking it’ narrative. A combined fiscal and monetary package will be well received.

It’s a good move we think from the BoE. Additionally, the Term Funding Scheme for SME’s to help the cheap flow of credit to them suggests the BoE seems to have got it just right. Furthermore, add to that the fiscal response as presented by the chancellor and the UK economy is preparing itself for the worst – and then that V-shaped recovery.

Because the virus’ spread is yet to peak, and if rate cuts and other measures can keep macro ticking over into and through that peak, there is every chance that we can head into the summer months not completely busted.

Overall, the day’s additional boosting activity from both the BoE and UK government were in response to the virus’ expected economic impact, delivering on its regional levelling-up agenda as promised in the Tory party’s manifesto and readying the UK for a post-Brexit existence.

And talk about opportunism – or panic, or just desperation! Danone wasted little time in believing a window had emerged and printed €800m in a 7-year at midswaps+93bp (-32bp versus IPT). Books were up at a huge €6.6bn as it fed the masses – investors, starved of deals these past few weeks.

Clearly, if one pays up, there’s always a window and enough interest. The initial new issue premium was 40bp, but that was on top of the massive repricing that we have seen in the corporate bond market.

For example, for Danone, it’s 2028s were trading at midswaps+15bp in mid-February but were much wider, at midswaps+92bp, as this deal hit the screens – and they paid a little more for the day’s new 2027 offering. The yield on the deal came in at around 0.56%.

The deal, though, was the first IG non-financial deal since March 5, when Vattenfall got €500m away. Catalent Pharma was the last HY borrower in the capital markets (on Feb 20) and Santander UK the last senior bank funder (Feb 21). Dire.


ECB up next, US administration needs

We might have bounced by 5% overnight in the US and had that big and unexpected rate cut in the UK. We might have been served with a UK budget designed to invest in the UK’s infrastructure as promised during the general election, as well having additional significant financial measures put in place to help stem the worst economic impact of Covid-19.

But equities didn’t bounce back as hard as we might have anticipated. Suspicion and nervousness remained and there was an eye on US equities, always ready to derail European markets. And they did.

The FTSE’s initial bounce faded and European markets followed as the bright start ended with markets closing in the red. In the end, the FTSE lost 1.4%, the Dax around 0.4% with the US markets off by up to 4% at our close – worsening just after (with another 1,000+ point decline in the Dow), as news filtered through that the WHO had declared the coronavirus outbreak a pandemic.

In rates, we had a bit of a mixed performance as we seemingly have found a new level from which to move up or down from. Gilt yields, despite the huge spending commitments, moved 3bp higher to 0.27% in the 10-year.

The market elsewhere was in choppy form and the Bund yield for the 10-year maturity was eventually 5bp higher at -0.75% at the close. The lack of any EU help for the Italian economy so far hasn’t beaten up the BTP market, where we are well off the recent highs, the 10-year BTP yielding 1.18% (-15bp). The US Treasury yield rose to 0.81% (+6bp), as at the time of writing.

In credit, protection costs rose again. iTraxx Main was 2.2bp higher at 103bp while X-Over protection rose by 16.4bp to 476bp.

The cash market in IG didn’t do much, probably having moved by a significant amount already which left the iBoxx index at B+170bp (+1bp). Even the AT1 market was relatively quiet (Deutsche Bank $ call and all) judging by some of the moves of late, the index up at B+639bp (+9bp). The HY index spread moved 28bp wider to B+570bp – and, such has been the devastation in just 3 weeks (+225bp widening), total returns here for the year to date are at -5.9%.

Now, it’s over to the ECB and with any luck, the EU.

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.