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29th March 2020

🦠 The Covid-19 credit gimme trade

MARKET CLOSE:
iTraxx Main

93.9bp, +8.5bp

iTraxx X-Over

576.2bp, +60.9bp

🇩🇪 10 Yr Bund

-0.47%, -10bp

iBoxx Corp IG

B+255bp, -1bp

iBoxx Corp HY

B+803bp, -26bp

🇺🇸 10 Yr US T-Bond

0.67%, -14bp

🇬🇧 FTSE 100

6032.18, (+0.09%)
🇩🇪 DAX

12674.88, (+0.66%)
🇺🇸 S&P 500

3351.28, (+0.06%)

Event-risk to offer more opportunities…

It looks like the IG corporate bond market is healing, albeit leaving a nasty scar. Corporates are playing the short game, borne from a necessity of shoring up balance sheets – and paying up for it. Of course, some of their justification for a print comes from the still historically low coupon payments, but they’re going to decline again – and stay low for years to come. These corporates could afford to wait.

Investors are playing the longer game. We think that the IG issuance is effectively akin to distressed borrowing given that the entities issuing are rock-solid credits, unlikely going to default or see ratings culled as a result of this recession.

Low policy rates forever means demand for this type of higher-rated instrument (paying more than the ‘risk-free’ rate) is the ‘gimme trade’ of the crisis.

That is, the likely V-shaped recovery is going to see spreads on some of the issues tighten by 100-150bp (some are already well on the way). Investors see that and have been falling over themselves to get their hands on the issues. This is 2009 all over again.

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