19th April 2020

↕️ More high/low beta compression

MARKET CLOSE:
iTraxx Main

82.3bp, -2.3bp

iTraxx X-Over

486.9bp, -6.2bp

🇩🇪 10 Yr Bund

-0.47%, unchanged

iBoxx Corp IG

B+209bp, unchanged

iBoxx Corp HY

B+652bp, -2bp

🇺🇸 10 Yr US T-Bond

0.64%, +1bp

🇬🇧 FTSE 100 6220.14, (+0.87%) 🇩🇪 DAX 12021.28, (+3.75%) 🇺🇸 S&P 500 3080.82, (+0.49%)

The lesser spotted HY deal..

Gosh! We had a high yield deal following a 7-week absence. Another 5.2m Americans lost their jobs last week, and although it was lower than the week before, it’s still over 22m losses since the pandemic was declared some four weeks ago. The data is poor on both the Q1 earnings front and in macro (Chinese GDP -6.8% in Q1). That bit was to be expected.

The markets are, however, looking to the bright side and way beyond that peak. There is a lack of permanency about the job numbers, with a macro bounce back anticipated perhaps during the summer months. As has been the case this past financial crisis (and now health crisis-ravaged decade) the doomsayers are being wrong-footed. The Gilead coronavirus drug trial, thought to be going well, has given markets another push amid hopes that we’re at the beginning of the end of this pandemic.

There is a feeling of a tentative recovery in the works. W or V-shaped recovery notwithstanding, the liquidity injections are looking like they will mask the underlying ills of the global economy a little longer yet. Risk is back on a roll, and we’re seeing further compression between high and low beta assets.

So that Chinese quarterly GDP print (the first negative one in over 40-years) has set a marker for the rest, and we will follow. It has also proved to be the hammer blow to oil, with WTI zipping through $19 per barrel, ad trading off an $18-handle, the lowest this side of the millennium.

US shale producers will go bust by the bucket load, but the knock-on impact to the rest of the US high yield market ought to be limited given the Fed assistance from the stimulus package.

Rising equities – if they can keep going, will engender an improved tone and we can expect the Street to tighten up the spread markets as a result. As suggested above, we must be looking at compression between IG and HY as a result into any improved tone in risk markets without there necessarily being any corresponding significant pick up in secondary market activity.


Primary high yield market hopeful

Month to date IG non-financial issuance comes in at €38.5bn (see chart, below) and over the years we have had several attempts at the €48.5bn record monthly total seen in January 2009. We have failed to get past €46bn during the various closer moments.

Primary Deal Issuance

 

Normally, €10bn over the next 9 sessions where the previous 11 trading sessions have delivered that €38bn would be a foregone conclusion. But, the earnings season is upon us, and that means blackout periods beckon. In addition, we have had a record run-rate of issuance and the IG primary markets would be forgiven if they had run out of puff.

Nevertheless, it’s a target. We know the demand is there. We also know the will to issue is, as well. Those two factors combined might get it us over the line.

Another big moment last week came in high yield primary. Verisure’s increased €200m offering, costing them €+500bp for the 5NC1 structure is at least a sign of a potential thawing in this market. Admittedly, the group is not necessarily a ‘pandemic-affected’ entity as such, but small steps.

We would think that if the market direction (tightening, high beta outperforming) continues in the same way over the next few sessions, then other borrowers will chance their arm. The high yield secondary market has been weak, it has been difficult to transact, repositioning has been impossible – but it hasn’t quite fallen out of bed. It did in 2008.


Calm closes us out

So, equities closed Friday’s session recording gains of up to 3.2%, for once closing out ahead of a weekend in positive fashion. A chink of light at the end of the tunnel? Or, that it cannot get much worse? The poor numbers on macro are probably baked in now, as will the weak earnings streams be for Q1 and the expectations for earnings in Q2/3.

Credit did very little, except for a deal from Thames Water which issued £350m in a 20-year at G+175bp. The IG market closed unchanged, leaving the iBoxx index at B+209bp while the HY market was also effectively unchanged to close at B+652bp.

Save for CPI and retail sales data in the UK, we’re a bit light on macro data during the first part of this week. Things perk up Thursday with manufacturing and services PMI data from the Eurozone/US/UK for April – and they promise to be as bad as they were in March. We close with US durable goods data for March, due on Friday.

That leaves the way clear for markets to glean what they can from the earnings season. IBM kicks off on Monday followed by Coca-Cola, Philip Morris, Netflix on Tuesday and AT&T on Wednesday. 3M and Intel announce theirs on Thursday.

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.