Fixed income

In our view the rationale for the premium is certainly weakening and, of course, we can no longer call it a ‘Brexit’ premium.

George Curtis discusses credit markets in Q4 2020 and provides his outlook for the year ahead

TwentyFour AM partner and portfolio manager Douglas Charleston discusses Q4 performance for ABS markets and provides his outlook for 2021.

TwentyFour AM partner and portfolio manager Chris Bowie looks back at investment grade credit market performance in 2020 and provides his outlook for 2021

For high yield issuers 2021 has started in a similar vein to 2020, with the technical backdrop providing an attractive environment for capital raising.

Our analysis indicates European ABS investors can carry forward little concern about nasty default surprises, and this is likely to be important when considering total returns for 2021.

At the moment CLO spreads are tightening, as they are right across credit. However, we haven’t had any CLO primary deals come to market so far in 2021, so we are operating in a bit of an informational vacuum, at which point these cross-asset class comparisons can be useful.

As we have said many times over the past few months, this cycle is likely to be remembered (among other reasons) as being exceptional for its unprecedented momentum.

So while we do believe inflation will push higher in 2021, we don’t think this will be a major issue for the central banks.

While we enter 2021 with plenty of negative headline news on the virus, along with the associated inevitable downgrade or delay to the economic recovery, in our view the technical position remains just as firm as it has been in the last nine months.

Yesterday the ECB released their guidance to banks regarding shareholder distributions. They have reiterated that banks should exercise extreme moderation on variable remuneration (bonus payments) and have set limits for dividend payments to equity holders and prudence on any share buy-back schemes.

As we are nearing the end of 2020 and assessing pockets of potential value going into 2021, we have to question the strong rally we have just experienced and assess the attractiveness of the hybrid spread multiple and whether or not we can expect further compression.

ESG investing was tipped to be the biggest theme of 2020 for financial markets, but was swiftly superseded by the COVID-19 pandemic, which has dominated investors’ thoughts since Q1. We thought it was important to revisit this topic and explore if and how the pandemic has changed the world of ESG.

We have now retraced some 90% of the March widening in European high yield (on a spread basis and relative to the January tights), a recovery trend we expect to continue as economies open up and demand bounces back. 

Speed of market movement will be a feature of this recovery as the market realises many of the same trends are firmly in place, and with the incredible technical backdrop this means lower yields as the cycle progresses.

2020 has not been an ideal year for those investors with a nervous disposition, as we have endured an unprecedented level of uncertainty soothed by an equally unprecedented level of monetary and fiscal stimulus

So while we certainly expect unemployment to increase across Europe, and we expect more borrowers will fail to pay their mortgages, we believe current mortgage performance is very far away from a level that would threaten coupon and principal payments in the major European RMBS markets.

The gradual backup in yields since the onset of the pandemic has given Treasuries a little more potency to protect bond portfolios, though we don’t see the rise being anywhere near big enough for them to behave like they used to.

Regular readers will know that we have a positive medium term view of spread products. This is based on a number of factors; valuations in our view are reasonably attractive compared to history, we are convinced that both monetary and fiscal stimulus will remain in place for an extended period of time, and perhaps most importantly we remain at a very early stage of the new cycle.

Thursday’s ECB meeting left us in little doubt that we should expect some serious action in December, including the possibility of some new, as yet unused measures.

Having fallen behind other markets in the post-COVID rally due to a lack of direct central bank support, we believe European ABS is set to outperform other parts of fixed income in the coming months as supply wanes and investors look to pick up on what we think could be a compelling relative value opportunity.

Barclays announced its results for the third quarter of 2020 this morning, with a number of media outlets opting to focus on a 6% year-on-year reduction in top-line income.

Unlike the past six months, where nearly all new deals performed well in the secondary market, from here on in that is far from guaranteed. Expect winners and losers.

Corporate hybrids have evolved in recent years into a large and well-established asset class within the European fixed income market, with €185bn of bonds outstanding.