31st March 2020

🗞️ Corporate bonds: Pile ’em high, sell ’em cheap

MARKET CLOSE:
iTraxx Main

98.1bp, -1bp

iTraxx X-Over

572.1bp, -8.4bp

🇩🇪 10 Yr Bund

-0.48%, +5bp

iBoxx Corp IG

B+252bp, -3bp

iBoxx Corp HY

B+782bp, -24bp

🇺🇸 10 Yr US T-Bond

0.68%, +1bp

🇬🇧 FTSE 100 6144.25, (+1.26%) 🇩🇪 DAX 11657.69, (+1.33%) 🇺🇸 S&P 500 3036.13, (+0.74%)

But it is a quarter to forget…

In the end we managed to finish in the black but there’s a feeling that we might be running out of steam. Having said that, it has been a super recovery-like period for the markets. It’s a case of too little, too late because it has been a devastating quarter for investors. We suspect that the turnaround is going to be immense, though, given the number of players looking for the ideal/opportune time to pile back in.

The rocket fuel is in place and being deployed (from the various stimulus packages) and will ultimately go a long way in assisting the recovery. Get the virus’ peak right (in the US), and one might just pick the bottom.

In the corporate bond market, the final session had us take down another flurry of deals, this time with 8-tranches from five IG non-financial borrowers. Equities added a percentage point or so. Oil edged off its recent lows. Credit spreads were stable. Q2? More of the same to start would be welcome.

The data in macro is as bad as we care to imagine. But it isn’t quite moving the market when it emerges. Be it inflation, investment, confidence, unemployment, sentiment, industrial/manufacturing and service sector activity, retails sales or GDP, we know the late Q1/mid-Q2 period will show depression-like numbers for the global economy. As much as they can, markets are looking beyond that.

We dare say that there might be other shocks or headline risks to contend with in the meantime. Hence the reticence to trade – or be the odd one out. So the herd mentality prevails. In credit, the biggest beneficiary of that is the borrower looking to get some additional levels of liquidity on the balance sheet (albeit paying up), and investors delighted to fund them knowing (or expecting) that spreads will tighten.

However, even if spreads do not ratchet tighter, it’s no bad thing. These are great entry levels given the crumbs offered pre-COVID 19. And the ‘risk’ levels to get those yields are lower – no longer needing high single-B risk for a decent coupon when a low single-A credit will offer it.

The problems are mounting for those lower-rated (orphaned) borrowers, however. The situation is salvageable, but we need that V-shaped recovery, and signs of it emerging some time in Q2. The markets have a short memory, they will be funding them without much hesitation if that recovery trajectory can be engineered.


Primary closes Q1 with a flourish

We’re seeing much more of how the market has gone through a stepped-change in the pricing regime. We had Fresenius print a 5-year for an increased €750m costing them midswaps+190bp, whereas back in January, they took 8-year funding at just midswaps+83bp. Books for the deal exceeded €4bn and the borrower managed to cull 45bp from the initial guidance that they had gone out with.

E.On would have printed at around midswaps+40bp in January for a 5-year (they issued a long 7-year at midswaps+50bp), and on Tuesday it cost midswaps+130bp for a €750m, 5.5-year deal. Books exceeded €7bn.

Airbus got in on the game. The aircraft manufacturer issued a 3-tranche deal for a combined €2.5bn. They issued €750m in a 5-year at midswaps+195bp, took €750m in an 8-year at midswaps+215bp and another €1bn in a 12-year at midswaps+240bp. Demand was over €11bn for the deals and final pricing was 40bp inside the opening talk across the three tranches.

Orange issued €750m in a long 7-year at midswaps+140bp (-50bp versus IPT) and €750m in a long 12-year at midswaps+165bp (also 50bp inside the initial guidance). Books came in at a massive €15bn. Finally, Daimler went for 5-year funding, issuing €1bn at midswaps+295bp, with interest for the deal at around €3.7bn and final pricing 30bp inside the initial mumble.

That concluded the deal flow for IG non-financials for the month/quarter. It was the fourth best month of issuance since 2014 with €44.6bn getting away through it (March 2016 saw €45.8bn, May 2016 some €45.4bn and €49.1bn was issued in Sept 2019). That’s impressive given that all but €6.8bn of it came from the 20th of the month onwards when Engie re-opened the market.

The pace of issuance for the first quarter is also in excess of last year, where the full-year 2019 saw a record level of issuance (€318bn). Whether we can keep going at this pace is going to depend on market volatility and whether there are enough borrowers willing to bite the bullet and print at these levels. The demand is certainly there.

Elsewhere, we had deals from REIT Vonovia, in a €500m no grow, 4-year maturity at midswaps+195bp and the same amount again in a 10-year at midswaps+240bp. Combined books closed in on €7bn and final pricing was 40bp tighter than the opening talk.

In the UK, Experian issued £400m in a 12-year at G+280bp with Optivo Finance printing £250m in a 15.5-year at G+230bp. Belgium issued €8bn in a short 7-year at midswaps+11bp.

Having got off to a very bright start in January which carried on through February, we were on track for a record year of issuance in the high yield market, without a doubt. The coronavirus pandemic stopped the market dead in its tracks.

The government/central bank stimulus packages announced arguably mainly offer direct support to the IG markets/corporates and the high yield market has become somewhat orphaned. Investors, too, have been left to fend for themselves. Spreads have gapped, but we are nowhere close to the worst levels seen in 2009 (barely reached 50% of those levels, iBoxx index).

Nevertheless, we had zero supply in this market in March. Going into April, the omens don’t look great and we might be heading – likely will be – for another month of no deal flow. The attraction just isn’t there given that many investors can get their fill of yield from the higher levels being printed in the IG market.


Hopefully we have seen the worst

The bright bit of news come from the Chinese manufacturing sector which recorded a bounce back in March, where the PMI jumped to 52.0 from 35.7 in February, and was in excess of expectations. We wouldn’t read too much into that, given the comparison is off a very low level and the challenges remain through Q2.

In a topsy-turvy final session, we eventually managed to clock up some gains in Europe, but there was no such luck in the US, as markets registered a large drop into the close.

And we might have seen out the opening quarter of 2020 with the FTSE adding 2% highlighting the big daily move in stocks of late, but the UK index closed the 3-month period losing 24.7% for investors. Similarly, the Dax lost 25% and the €Stoxx50 -25.6%.

In the US, it’s been a little better but the losses have still been huge nonetheless. The S&P was down 20% for Q1 and the Dow had given investors a 23% loss. It could be worse – after all, Brent has been hammered and is over 60% lower in the same period.

In credit, the story has been as bleak. Primary might have been an opportunity during the last week of the quarter, but secondary markets and valuations have been trashed.

The IG market saw spreads widen by 150bp to B+252bp (iBoxx index) in the quarter, with total returns at -6.2%.

It was worse lower down the totem pole, with the AT1 market off by 18% as the high yield market gave up 15.2%. HY index spreads were 440bp wider in the quarter.  There was no issuance in the month and the last time we drew a blank in high yield issuance for any month, we have to go back to December 2009.

The IG sterling market lost 5.4% on index spread widening of 110bp. Euro sovereigns delivered +0.4%. Phew!

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.