10th May 2020

🗞️ Looking beyond the first half

MARKET CLOSE:
iTraxx Main

86bp, unchanged

iTraxx X-Over

515bp, unchanged

🇩🇪 10 Yr Bund

-0.53%, -1bp

iBoxx Corp IG

B+196.7bp, -0.5bp

iBoxx Corp HY

B+662bp, unchanged

🇺🇸 10 Yr US T-Bond

0.68%, +5bp

🇬🇧 FTSE 100 6104.73, (+1.71%) 🇩🇪 DAX 13066.54, (+2.36%) 🇺🇸 S&P 500 3431.28, (+0.67%)

Data and markets diverge…

There was no shock but certainly a bit of awe. And plenty of headlines about the post-war high 14.7% US unemployment rate and the record loss of over 20 million non-farm jobs in April. Markets, though, are looking beyond it – because that was all well-telegraphed. The numbers in Europe through last week, for April, were just as unedifying. May’s data will be poor too but with lockdowns easing, we have some recovery in activity and there is a path to some sort of recovery being established.

The dynamic of that recovery, though, remains uncertain. Nevertheless, equities are already trading the second half of 2020. In credit, things move slower. That’s the nature of the fixed income markets. Highly indebted corporates are busy trying to remain solvent. Their ability to service their obligation is paramount. Otherwise, default beckons.

The primary markets though are open for IG corporates and they are printing at a record pace, in order to defend and bolster balance sheet integrity.

It’s been quiet on the HY front with just a handful of deals in the market. This market is reeling. But we wouldn’t know it. It’s quiet. Spreads gapped at the end of March but recovered 50% of the weakness. Mind, they didn’t get to anywhere close to the wides seen at the height of the financial crisis in 2008.

But the market has been treading water for the best part of three weeks. It’s not going to be pretty once we start the reports start to emerge of their predicament and financial health. A default rate of 10% or less this year would be a result. For now, calm.


Path clears as earnings season slows

Primary was closed on Friday owing to the VE Bank Holiday in the UK. However, we could do with the rest and few will have complained. €11bn has been issued already this month (in a week) and for the full year, IG non-financial issuance is up at €164bn.

Projecting out, and if we assume the sense of crisis remains for another couple of months, then we could be looking at somewhere in the €220bn being issued by the end of June. Last year’s record supply saw almost €320bn issued and the average of the 2014 – 2019 period was €266bn. €350bn+ for the full-year, perhaps?

Investors are only too happy to lift the paper being offered and we are not yet seeing any pushback at the declining new issue premiums. We suppose that as long as deals perform, and can attract massive books/oversubscriptions, then the herd should follow.

In secondary, we closed last week edging tighter in the final limited session, but spreads were 4bp wider in the week, leaving the iBoxx index at B+197bp. Sharply higher equities had little or no impact. That was also apparent in the AT1 index, which would usually mirror the move in stocks all things being equal. The index edged wider to B+895bp – around 35bp wider in the week.

The high yield market closed unchanged, with the index at B+662bp (although +16bp in the week).

Elsewhere, that non-farm report and unemployment rate in the US seemed to be largely ignored. There were some positive noises on the US-China trade situation, but it will remain front and centre in terms of headline risks this side of the US election.

The S&P index is up at 2,930 later adding 1.7% last week. Even Bitcoin exceeded $10k before dropping back. Crude prices have recovered well, too. On the safe-haven side, we still a decent amount of interest in the bond market, keeping Gilt yields in the 10-year benchmark anchored at 023%, the German Bund yield at -0.53% and her Treasury yield in the 10-year below 0.70%.

As for this week, we have US CPI and PPI, UK and Eurozone industrial production and German and Spanish CPI. On Friday, we have Chinese industrial production and retail sales, and preliminary Eurozone GDP for Q1  (-3.3% YoY, consensus).

Finally, a raft of US data comes in the form of industrial/manufacturing production, retail and the Michigan survey.

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.