Fixed income

Rates risk is not something we concern ourselves with too much in the European ABS market, so normally news of inverted yield curves and 30-year US Treasury yields dropping below 2% would largely wash over us. This is because pretty much all ABS bonds are floating rate, so there is no duration. Or is there?

Today marked the arrival of a long expected event, namely the inversion of the US yield curve between two and 10 years. This is an important event as historically it has been a very reliable indicator of impending recession. History tells us that once the 2s-10s curve inverts, on average a recession is a year to 18 months away.

The current US economic expansion is now the longest in modern history, and investors globally will be seriously contemplating the end of the credit cycle. This late-cycle period could prove particularly challenging. Mark Holman, chief executive of TwentyFour Asset Management presents five tactics for fixed income investing late in the credit cycle.

Since the two anti-establishment parties (The League and Five-Star) formed a coalition and took control in Italy, markets have been uncertain on the domestic government policy that was promising many things to many people and ultimately creating considerable friction with the European Commission (EC).

The embers of the European ABS H1 primary pipeline are now cooling down for the summer break. After a slow start to the year driven by the delayed implementation of new regulations, we saw an increasingly busy pipeline as Q2 developed and became the third busiest quarter of issuance post crisis. July saw almost €20bn equiv. of supply, taking the year to date total to €58bn including a record €19bn in CLOs. This accords with our somewhat contrarian view that 2019 issuance would eventually keep pace with 2018 (a post crisis record). July’s total went a long way in achieving this, bringing YTD issuance just 6% short of the 2018 run rate. In late June this was 28%.

August has been a very challenging month so far for risk markets, while in traditional risk off, UST treasuries have seen sharp declines in yield back to the lows last seen in October 2016. We can’t help but think that this sharp adjustment will become more ingrained in August, following 6 months of relatively benign markets.