19th January 2020

🗞️ Starting with a rate cut

MARKET CLOSE:
iTraxx Main

42.6bp, -0.7bp

iTraxx X-Over

207.1bp, -0.6bp

🇩🇪 10 Yr Bund

-0.22%, unchanged

iBoxx Corp IG

B+103.7bp, -1bp

iBoxx Corp HY

B+336bp, -2.5bp

🇺🇸 10 Yr US T-Bond

1.83%, +2bp

🇬🇧 FTSE 100

7042.47, (+0.35%)
🇩🇪 DAX

12774.88, (-0.12%)
🇺🇸 S&P 500

3116.39, (+0.32%)

If you can’t beat ’em, join ’em…

Just two weeks into the New Year and a UK rate cut is just about in the bag. Rallying Gilts and a solid bid for sterling corporate credit has seen the sector outperform – with spreads tighter by 6bp (iBoxx index) and returns already up by 2%. Friday’s horrible and continued decline in retail sales for December (fifth monthly drop in a row) – allied with other weak data during the week, and amid protestations of a cut being needed by various MPC members all suggests an interest rate cut is likely at the next meeting (Jan 30).

There’s little point in hanging around. After all, waiting for a Eurozone or Chinese recovery is not going to bail anyone out.

Although China recorded its slowest annual growth rate in almost 30 years of 6.1% for 2019, it seemed to cheer investors relieved perhaps that the figure at least came in line with expectations. European equities joined the ‘record breaking’ bug. Always in the slip stream of US equity markets, they finally headed into record territory as the bourses across most of Europe set intra-day record highs – save for the FTSE, but that will no doubt come in due course.

We suggested last week that Main and X-Over are heading for 37bp and 180bp from 42.6bp and 207bp currently, respectively. That was borne from our bullish assessment for credit following a solid start to 2020 emerging from the clearing of the ‘event risk’ pathway (China trade, Middle East for example).
Admittedly, much is being ignored. And just as the US earnings season is underway, seemingly adding to the sense of a ‘steady as she goes’ dynamic, notwithstanding that macro remains locked in an extended Goldilocks-like transition. Rising equities will lift all markets.

Also, our expectations are driven by a financials sector which appears as if it is going to be in fine shape this year, with results from the sector (in the US anyway) easily beating expectations and ending last week with Morgan Stanley setting an annual profits record, for example. Cash financial credit is sitting pretty and the subordinated debt market is bid-only.

But to complete the picture, we should look at where the iTraxx Senior and Subordinated are possibly heading. The indices currently reside at 50.6bp and 108bp, respectively (ratio at 2.1x), and if the European banks can manage their fundamental upside through 2020, then we would target 40bp on Senior and somewhere south of 95bp in the Subordinated index.


The curious case of missing IG non-financials in primary

The theme in both supply and performance for these opening couple of weeks of 2020 has centred on issuance from the financials sector. We have been awash with covered, senior and subordinated debt – they’ve all been taken down aplomb and there has been little – rather, no – impact of the welter of deals on secondary valuations. In the main, secondary is tighter with subordinated outperforming and new deals have generally tightened on the break.

More deals on the screens from IG non-financial issuers would be appreciated, however. We had just €3.05bn printed last week, from five borrowers. And the monthly total sits at just €14.3bn versus €27bn for the whole of January last year. So we’re on target for a similar amount, but after that €11bn in the opening week of 2020, we might have expected in excess of €30bn.

Senior issuance has been in glut-territory. €23.25bn is the best for several years and there appears little let up in the pace of issuance which should take us through the €30bn barrier by the time this week is up.

Add in the Tier 2 borrowings and the several AT1 offerings, and we can see how financial issuance is taking up the slack from the reduced issuance from non-financials.

On Friday, we had deals from US REIT Public Storage which issued €500m in a 12-year priced at midswaps+65bp (-35bp versus IPT) as Nationwide Building Society issued £500m in a 3-year senior preferred at G+65bp.

In high yield, Salini Impregilo was due to price €250m of a 7NCL issue to yield 3.625%.


Record equity markets to deliver more

So we closed last week with a record high in the US S&P500 index, a closing high for the Dow and Nasdaq with a similar picture across most European bourses. There’s some momentum behind the moves and there’s little reason to not push on if – and assuming, the earnings season continues to play ball. The next 2-3 weeks in the US will be important in that respect, while the macro data continues to point to an uncertain outlook but enough for us to believe a Goldilocks-like dynamic (not too hot/cold) is in play.

In rates, the Gilt market is expecting a cut next week, nd the 10-year Gilt yield continues to be bid-up, the yield closing last week at 0.63bp (-1bp on Friday, -13bp in week), while the Bund closed the session unchanged to yield -0.22% and the Treasury a basis point higher in yield, at 1.83%.

Cash credit was better bid as we might have expected given the exuberance elsewhere. The iBoxx cash index in IG closed at B+103.7bp (-1bp) and is back to flat for the year. The AT1 market likewise was squeezing, by 6bp in the session leaving the index at B+373bp (or +1% returns in two weeks) while the high yield index closed at B+336bp (-2.5bp and -10bp this year so far).

As for this week, the earnings season ramps up. Last week was all about the major Wall Street banks and we have technology stocks set for this week and next. Netflix and Intel will lead with J&J, IBM, P&G and United Tech amongst this week’s heavyweights. We’re light on economic data for the week, but we wrap up with a raft of PMI data on Friday.

The US markets are closed on Monday for Martin Luther King Day.

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.