23rd April 2020

🗞️ So THAT’s where the smart money is!

MARKET CLOSE:
iTraxx Main

82bp, -3.2bp

iTraxx X-Over

489bp, -17bp

🇩🇪 10 Yr Bund

-0.43%, -1bp

iBoxx Corp IG

B+205bp, -5bp

iBoxx Corp HY

B+xxxbp, -+xbp

🇺🇸 10 Yr US T-Bond

0.61%, unchanged

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

Finding ways to play it safe…

The smart money, or the money, in the European bond markets, has been trading the ECB bid. If the biggest buyer of euro-denominated IG corporate/Eurozone government bonds is involved, then so are investors. We’ve seen that clearly in corporate primary.

With so much uncertainty unleashed by the ongoing COVID-19 pandemic, it seems reasonable that any new positions at least have the comfort of a price-insensitive back-stop bid.

We’ve seen it in the huge demand registered for this week’s Spanish and Italian sovereign debt offerings. And we’ve seen it in anything ECB ‘eligible’ in the corporate bond market where books are unusually massively oversubscribed.

Although games are being played – they are now expected to continue – by investors and issuers alike (oversubscription, 20-60bp of tightening versus IPT, price discovery dynamics out of the window), everyone knows which side their bread is buttered.

As an aside, we’re not seeing much by way of covered bond issuance. Of course, the banks are using the cheaper and various ECB windows for the funding, but what about the covered bond mortgage pools? If the assets fall short in coverage the banks will have to dip into their own liquidity to prop them up and maintain over-collateralised pools. Not a problem. Until the rating agencies start to potentially take a dim view.

Anyway, that was a diversion. We’re pretty sure that there won’t be an issue. We can’t say the same for the corporate bond market. Here, the earnings season is as bad as can be. There is no forward guidance. In fact, there’s very little at all to be upbeat about.

Equity markets see more up days than they have to handle weaker moments. Credit spreads in the highly correlated HY markets have held up well. We still worry about ‘stuff’ lower down the totem pole, though – triple Cs, weak single Bs and CLOs. Trading liquidity here is shot, and soon too will be balance sheet liquidity.


IG record primary month beckons

The ECB has been in ‘bail-out of the market mode’ since 2009. They’ve held it all together. That’s a fair assessment and credit (we suppose) where it is due. The move to support the fallen-angel market will further support the corporate bond market.

Corporate primary will react. We might be in an earnings blackout zone for many entities, but we will still possibly have enough being printed over the next few weeks. The record level of IG non-financial debt issuance so far this year, lapped up by investors will see them sit on some much-needed profits.

Anyway, we had deals on Thursday. APT Pipelines issued €600m at midswaps+210bp, which was 40bp inside the initial guidance with interest up at €4.1bn. Then we had Switzerland-based Firmenich issue €1.5bn in an equally split long 6-year deal at midswaps+155bp and a 10-year tranche at midswps+185bp. The deals were 40 – 45bp inside the initial talk across the two tranches, with combined books at €7.3bn.

Those deals took the year to date total to a massive €140.6bn and the monthly total to €44.8bn (see table, below). With that, less than €5bn of deals are needed to achieve the month record – which was last September, at €49.1bn.

April 23rd 2020 IG Issuance

Of course, in high yield one of the big beneficiaries of the lockdown has been Netflix and while the going is good for them, they’re making the most of it. Few will blame them. They become only the second public borrower in the high yield market since February 20 (following on from the €200m  Verisure offering) with €470m of their own funding. The Netflix 5-year euro-denominated offering was priced to yield 3% which cam alongside a $500m dollar tranche (at a yield of 3.625%).

Finally, Hungary became the latest sovereign in the market, raising €2bn in a dual part 6-year and 12-year offering.


Markets preferring to look ahead

There were several items of interest in the market in this week’s penultimate session. The news that the ECB had relaxed corporate bond collateral rules to accept fallen angel bonds. The triple-B IG non-financial market is €750bn in size (iBoxx) and we’re going to witness a swathe of fallen-angels over the coming 6-12 months.

But the measures help banks which hold the bonds and use the repo facility. They also help ‘large’ rated companies. There’s nothing here for the SMEs (usually unrated and the area where the help is really needed). So, no doubt the corporate markets will feel the benefit (in IG) but asset price inflation there doesn’t funnel through into the real economy.

On the real economy, we were hit by a mass of the poorest PMIs on record. The problem is that it’s likely going to get worse. If you shut down the world, abruptly, those numbers are about what we ought to expect. The markets reacted as such with equities barely moved, rates didn’t budge and credit was probably better bid for choice. They’re looking past the data.

Business activity in Europe ground to a halt in April. The services sector PMI for the Eurozone was 11.7 (expected 23.8), manufacturing was 33.6 (expected 39.2) and the composite was a shocking 13.5 (25.7 expected). The UK fared just as badly.

In the US, new jobless claims for last week rose by another 4.427m and the total jobless since the pandemic started has risen to a record 26m. The trend is downwards – and the equity markets were hanging their hat on that as well as trying to look at what’s on the other side, post lockdown.

The PMIs in the US followed the trend established in Europe, although the picture wasn’t as severe – probably because the lockdown came later and isn’t quite uniform across the country. Anyway, the manufacturing number dropped to 36.9 from 48.5 in March with the services index at 27 versus almost 40 previously.

Equities rose by around 1% in Europe and were heading for 1%+ gains in the US. Rates were better bid for choice, leaving the US Treasury 10-year yield at 0.61%, the Bund at 0.43% (-1bp) and the Gilt to yield 0.29% (-4bp).

Protection costs declined, with iTraxx Main 3.2bp lower at 82bp and X-Over 17bp lower at 489bp. In cash, IG was 5bp tighter at B+205bp (iBoxx index) and the AT1 index was 40bp tighter at B+929bp. The HY index was 8bp tighter at B+660bp.

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.