26th March 2020

🗞️ Great rally, but there should be more opportunities

MARKET CLOSE:
iTraxx Main

85.4bp, -3bp

iTraxx X-Over

515.3bp, -15bp

🇩🇪 10 Yr Bund

-0.37%, -3bp

iBoxx Corp IG

B+256bp, unchanged

iBoxx Corp HY

B+804bp, -25bp

🇺🇸 10 Yr US T-Bond

0.83%, -3bp

🇬🇧 FTSE 100 6076.60, (-2.29%) 🇩🇪 DAX 11586.85, (-1.65%) 🇺🇸 S&P 500 3044.31, (+0.48%)

Better to be safe than sorry…

The opening of a window and ‘hey presto!’, there is no shortage of borrowers jumping through it, albeit paying up to get deals away. We don’t think that, perhaps down the line, it is going to be seen as a panic move even if the companies issuing do not have a liquidity problem and are unlikely going to have one.

We do, however, think that the issuance will be seen as a good opportunity to get some additional cash in, to beef up and maintain a conservative balance sheet and preserve ratings.

The same goes for investors. Buy in haste, repent at leisure? We are beginning to think maybe not. These primary market clearing prices are great levels coming after an extended period of being starved of decent spread through several years of low rates, and central bank manipulated markets. That’s still happening.

There has been a huge level of price discovery, too – an excuse to go out with wide indications and then ram the final pricing tighter. We’ve seen 20 – 60bp of tightening in the final pricing versus the initial guidance and books have been anywhere between 7 – 10x oversubscribed for many of the deals (22x for the Air Liquide deal on Thursday).

One will rarely pick the bottom of the market. Given the various Covid-19 trajectories in the US and Trump’s hitherto flailing response, there is a strong argument for erring on the side of caution.

Nevertheless, that huge equity market response to the fiscal stimulus announced in the US and Germany saw a pull back in spreads. On the back of it, primary has become the mechanism of choice to take on risk since it at least provides some ‘depth’ in terms of volume and liquidity.

And with such little secondary activity going through and barely any offered side liquidity when equities rocket higher, we are seeing some massive moves in the most vulnerable, high beta part of the credit market.

That leads us the to AT1 market where the index reached a record high spread of B+1515bp earlier this week, before a 250bp+ recovery into the 2-day equity market binge to B+1250bp. One would be forgiven in thinking that they had missed a trade.

In the high yield market, seen by many as being left hangout to dry as governments do their utmost to save the IG corporate fraternity, we have also seen a good recovery in spreads. They gapped to B+913bp (iBoxx index), also earlier this week, but have since recovered by almost 80bp to B+830bp.

These are big recoveries and highlight how the high beta spread markets might recover once we hit that virus peak and start to see the first vestiges of a recovery/return to normal. Things will eventually  improve. Buy what you like and then justify, hold and ride out any impending storm(s) works for many.

There will be more opportunities, though. We’re sure of it.


Sweeping doubts aside

So after a plethora of issuance in Wednesday’s session, with nearly all of which that mattered coming from the IG non-financial corporate community, we followed up again on Thursday but with more financial senior deals. The levels to print took us back to the 2009/2012 period, eye-wateringly wide.

There’s a swagger in the primary markets at the moment. The news flow around the ECB’s ‘limitless’ buying plan and every other announcement of a stimulus or whatever, is greeted with a wave of borrowing/capital markets financing.

As if Wednesday’s issuance opened up the eyes of borrowers – demand was huge and they realised that they could quite easily get deals away, although they paid up for market access. A near €6bn IG non-financial issuance got away midweek from 9 tranches and we had another explosion of deals during this session as the likes of John Deere, Air Liquide, Suez and Ahold amongst others collected their booty, allied with senior deals from Barclays, Natwest and Credit Suisse.

To the details. Air Liquide kicked us off with two €500m no grow deals priced at midswaps+120bp for a 5-year and midswaps+140bp for a 10-year which were priced 45-55bp inside the initial guidance, all made possible with the books up at an astonishing €22bn.

Aeroports de Paris issued €1bn in a 6.5-year at midswaps+240bp and €1.5bn at midswaps+290bp with final pricing some 60bp inside the initial guidance and books up at €13.75bn!

Then came Ahold Delahaize. This was just a single tranche for €750m for a 7-year at midswaps+190bp, -45bp versus IPT and books at €6.2bn. Suez was also a single tranche effort, for €850m priced at midswaps+135bp (-25bp versus IPT, books over €4bn) in a 7-year maturity.

The last of the European corporates was Saint-Gobain in a dual-tranche €750m 3-year and €750m in a long 7-year at midswaps+205bp and midswaps+255bp, respectively. Books of €8.6bn saw final pricing 45bp inside the initial talk.

And finally, we had John Deere, bring up the rear for US borrowers. They took €800m in a 4-year at midswaps+160bp, €600m in an 8-year at midswaps+190bp and €600m in a 12-year at midswaps+210bp. Interest was up at over €11bn combined with final pricing 35-45bp tighter across the tranches.

In just three sessions this week, over €20bn has been issued in IG non-financials and almost €32bn for the month so far, and there is clearly appetite for much more.

In financials, we had senior deals from NatWest for €1bn in a 5-year at midswaps+300bp (-40bp versus IPT, books €5.3bn), Barclays took €2bn in a 5NC4 costing midswaps+370bp (-40bp versus IPT) with books at €8.25bn, and then there was Credit Suisse taking €2bn in a 6NC5 structure at midswaps+350bp (-40bp versus IPT) with books up at €12bn!

Austria raised €7.5bn in a dual tranche deal garnering interest of €33bn for the two offerings.


If it looks like a Bazooka…

Every announcement of a stimulus is being described as ‘a bazooka’. Of course, the markets initially react, but then usually comes a period of soul-searching and some the gains are faded. That is, there is still enough uncertainty, even if the central banks are underwriting the financial system, that makes investors somewhat hesitant about piling in.

However, looking at the primary credit markets alone, they are pricing in a sharp downturn and an equally sharp recovery albeit comforted by a level of support for the IG corporate sector anyway by the promise of credit/cash support for it.

The politicians and scientists might be nervous about the virus’ spread trajectory and the economic impact of all the lockdowns/bailout costs, but the market sees a V. And only a V.

Equities are roaring. We added almost another 5% in the US, the FTSE gained over 2% after some earlier doubts and even the Dax was dragged higher by the US recovery, adding another 1.3%.

We had a better bid in rates, too, which saw the 10-year benchmark Bund yield 3bp lower at -0.37%, the Treasury at 0.83% (-3bp) and the Gilt yielding 0.39% (-3bp).

The synthetic market tightened harder in previous sessions, but few are unwinding any trades/hedges. iTraxx Main moved just 3bp lower to 85.4bp and X-Over by just 15bp to 515.5, the ratio unchanged at just over 6x.

In cash, the snap back stopped in IG anyway. The huge amount of supply is pressuring the market. IG spreads closed unchanged, with the iBoxx index at B+256bp. No deals in sterling saw the IG index here 7bp tighter at G+281bp.

The AT1 market was helped by the poorest of liquidity and was tighter on the iBoxx index by 135bp – or 400bp this week off those record wides, left now at B+1115bp. As for the corporate high yield market, we had a 25bp tightening which came after the 54bp tightening in the previous session, leaving the index at B+804bp.

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.