27th April 2020

🌸 Risk markets to keep flowering in May

MARKET CLOSE:
iTraxx Main

81.1bp, -3.6bp

iTraxx X-Over

494.5bp, -7.2bp

🇩🇪 10 Yr Bund

-0.45%, +2bp

iBoxx Corp IG

B+195bp, -7bp

iBoxx Corp HY

B+654bp, -8.5bp

🇺🇸 10 Yr US T-Bond

0.65%, +5bp

🇬🇧 FTSE 100 5993.28, (-0.37%) 🇩🇪 DAX 11073.87, (+0.07%) 🇺🇸 S&P 500 2955.45, (+0.24%)

Liquidity, lots of it… Magic

It’s been very bad. But the markets are telling us that we will avoid financial (system) Armageddon. Too many have looked into the opening black hole and jumped into it. But the brakes were engaged and the various stimulus packages (Japan being the latest) have seen a remarkable April recovery. Into a dire earnings season and amid the poorest macroeconomic environment seen in several generations, markets are fighting back.

The outlook appears to be brightening. We’re nowhere close to riding high to those record levels seeing February. But the equity markets have put on somewhere between 6% to 10% in April so far. Eurozone rates have been flat, with yield impacts neutral from the huge issuance to come offset by the ECB grabfest.

Despite protestations to the contrary, in credit, euro IG has added 2.8% in total returns (iBoxx index), the AT1 market 7.2% and high yield +5.2% this month so far. Supply in the non-financial IG market is running at a record pace, 90%+ of deals are tighter than re-offer.

Investor confidence is high. And we have seen the opening stages of a thawing in the high yield primary market, where even Merlin Entertainments got an upsized €500m away at the lower end of the range at 7%. Things can accelerate from here very quickly and we can easily add to the miserly total of 3 deals issued in this market since Feb 20, if the upbeat tone persists.

Risk asset returns/performance might not go to the moon though and there will be a more depressing payback time in the future. But for now, it would appear that the huge government action to keep liquidity, credit and any other lines open for the corporate market has staved off the very worst. In a sense, policy action has been honed to perfection, borne out of the financial crisis years.


The market works in mysterious ways

The UK’s Boris Johnson might have warned against lifting the lockdown restrictions too early, but the markets were in no mood to be sidetracked. Mind, he did suggest a firing-up of the economy once the lockdown ends. The FTSE added 1.6%, the Dax rose by over 3% and US markets, with lockdowns easing in states across the country, were 1% or more higher, as at the time of writing.

And that came after we were met with March’s 35% decline in Chinese industrial profits, year on year. While the Bank of Japan committed to buying unlimited quantities of government debt. Oil was battered after the world’s largest ETF, the United States Oil fund, sold the front end (June WTI contracts) to invest in longer-dated ones. WTI prices dropped to trade off a $12-handle (off by almost 30%).

Italy (surprisingly) managed to hold off a debt downgrade from S&P at the end of last week, and that gave BTPs a lift. The 10-year yield on the BTP has now dropped to 1.75% (-14bp) having been as high as 2.25% during last week. The 10-year yield for the Bund was at -0.45% (+2bp), the Treasury moved to 0.65% (+5bp) and Gilts were unchanged to yield 0.30%.

In credit, the primary deal of note came from Pernod Ricard. The group helped reopen the market in April with €1.5bn of a dual-tranche 5 and 10-year offering and added €250m to each issue in Monday’s session. Just to highlight how far the market rally has gone, the taps were priced 52bp and 73bp, respectively, inside the levels the group previously printed at. That augers well for beleaguered investors – trying to recover any performance they can, and who may have managed to take down any chunk of April’s deal flow.

The issuance for the month so far has now risen to €46bn (IG non-financial) and is now the second-best month for IG deals ever. The €49.1bn record monthly total from September last year is in reach. Air Products and Amphenol Corp – amongst others possibly – are due this week, and we might just make April 2020 a record month for IG issuance yet. Who would have thought?

As we suggested already, it will play into the narrative that the credit market isn’t quite broken, in IG anyway. The ECB’s backstop bid and deep pockets are going to keep the IG market humming away through the summer months.

The iTraxx indices continued to show protection costs fall as the mood continued to brighten – for IG. We were left with iTraxx Main at 81.1bp (-3.6bp) and the X-Over index underperforming and dropping to 494.5bp (just -7.2bp).

Secondary credit market activity was limited at the start of this shortened May Day holiday week, with the FOMC also due on Thursday. But we continue to tighten in spreads. There was a good squeeze in the session leaving the IG index at B+195bp (-7bp) and recording some 57bp of recovery this month.

The AT1 market was better bid and the index back at B+900bp (-37bp) and no doubt some comfort was gained from a Deutsche Bank pre-earnings update where Q1 revenues and earnings would beat estimates even as capital buffers would decline. The high yield market moved a little more cautiously, leaving the index at B+654bp (-8.5bp) for its troubles.

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.