19th February 2020

🗞️ A midweek flutter

MARKET CLOSE:
iTraxx Main

41.5bp, -0.5bp

iTraxx X-Over

211.4bp, -2.6bp

🇩🇪 10 Yr Bund

-0.42%, -1bp

iBoxx Corp IG

B+100bp, unchanged

iBoxx Corp HY

B+337bp, -2bp

🇺🇸 10 Yr US T-Bond

1.57%, +1bp

🇬🇧 FTSE 100

5510.33, (-5.25%)
🇩🇪 DAX

9632.52, (+1.90%)
🇺🇸 S&P 500

2626.65, (+1.89%)

Credit, where it’s due…

The reported number of daily coronavirus cases/deaths slowed – and the markets rallied. The corporate earnings/revenues and macro economic data to come are going to paint a bleak picture for Q1, but that is for another day.

As things stand, the market reaction is going to be very limited (to the downside) because they are going to be furnished with oodles of cheaper liquidity.

In fact, all markets have traded on that expectation and the coronavirus has failed to dent the enthusiasm for risk assets. The anticipation of more and even cheaper liquidity has retained a level of buoyancy in risk markets beyond anyone’s expectations. That’s probably the salutary lesson of the post financial crisis 10-years.

Ten days left to month-end and the credit market has performed much better than expected. IG non-financial primary has sparked into life this month with this threatening to be the best February month of issuance since 2015 (issuance at €28.8bn month to date versus €40bn in 2015). Spreads have tightened by 5.5bp this month into it.

Demand in primary is at record highs as new year cash, new cash and redemptions all look for that higher yielding ‘safe-haven’ fixed income asset. The rally in the underlying has pushed total returns (iBoxx) to 1.25% for the year so far.

We think the high yield market is the one which has surprised, though. Issuance year to date is up at a stunning €20.6bn amid a splurge in issuance which saw €13bn issued in January and €7bn this month so far. The pipeline is looking fairly good too. That’s the story.

High yield spreads, though, have also been holding up well considering the potential for macro event risk and the correlation that has with demand – and performance for high yield bonds. The HY iBoxx index is 16bp tighter in 2020 and returns exceed 1% already this year.

Those high levels of issuance have failed to dent secondary performance, in part due to traditional IG investors back again investing the market – forced to do so by the crunch lower in yields, and crowding-out effects of the ECB’s nuisance QE-related IG corporate bond sector purchases.

As has been the case for over a year now, the AT1 market is the best performer. The index is 40bp tighter already this year, deals have been massively oversubscribed, regular subordinated (T2) offerings from even the riskiest of borrowers (triple C rated greek banks) have been gorged on.

All in the name of yield. It’s worked, with investors enjoying total returns of 2.6% so far this year.

Lest we forget sterling. There’s been a decent level of issuance, Gilts have been well-bid generally and the longer duration nature of the sterling corporate bond market has pushed total returns in it to 2.5% for the year to date, on iBoxx index spreads tighter by 7bp.


Up, up, up

Inflation was on the up in both the UK and US. Consumer goods rose by a higher than expected 1.8% in January for the former (versus 1.3% in December) while in the US, we saw PPI at a 2-year high in January of 1.7% year-on-year.

The IMF kept its global growth projections unchanged, expecting it to come in at 3.3% still (against global growth of 2.9% in 2019). That was caveated though with risks coming to a fragile recovery from the potential for renewed trade fears, but more so from the as yet coronavirus’ impact on economic activity.

Nevertheless, UK stocks rose by 1% as the €Stoxx50 rose by +0.7% with the Dax up by 0.8% and close to a new record. At the time of the European close, the S&P was having a go at setting a fresh record of its own, as was the Nasdaq, just as Tesla – the current darling of the index, saw its share price shoot through $900 per share.

In rates, we had bit of mixed picture. The Bund was slightly better bid, leaving the yield at -0.42% (-1bp) on the 10-year and at 0.60% (also -1bp) for the same maturity Gilt. Treasuries were a touch better offered and the yield rose to 1.57% (+1bp) for the 10-year.

Credit primary hit a couple of sweet spots with a couple of deals playing into the higher yield-demand narrative highlighted earlier. Supposedly. Albeit in dollars, Iceland’s Arion Banki issued a $100m CoCo to yield 6.25% for the perpNC5.5 structure with books at 5x subscribed, but ING’s efforts to raise $1bn of a PerpNC-2029 AT1 deal at a yield of around 4.625% hit the rocks – even with books 11x subscribed. They pulled it.

In euros, Swedish Match issued €300m of a 7-year at midswaps+118bp (-27bp) and GM Financial issued €750m of a 6-year at midswaps+115bp (-25bp versus IPT).

Away from credit primary, secondary didn’t too much with IG spreads unchanged (iBoxx index at B+100bp) and the CoCo index likewise was unchanged and closed at B+338bp. the high yield market edged better to B+337bp (-2bp).

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.