Fixed income

The cycle of banks calling outstanding capital bonds continued this week and we’ll soon be bidding fond farewells to two of our long held and favourite positions; Nationwide’s 6.875% Additional Tier 1 (CoCo) and Barclays’ 14% hybrid Tier 1.

Since the start of the year credit markets have been very well supported, reversing much of the sharp period of spread widening we experienced in the final quarter of 2018.

The ECB published the result of its Supervisory Review and Evaluation Process (SREP) yesterday, which increased the average capital requirements for European banks, and overall, increased the average SREP requirement by approx. 100bps.

For fixed income investors, it has been impossible to ignore the proliferation of press coverage about the growth of the triple-B rated corporate bond market, and a coming wave of downgrades for companies rated BBB to high yield, with these ‘fallen angels’ exposing investors to mark-to-market losses at best, and defaults at worst.

After what has been a terrific year for risk in 2017, making our predictions for the upcoming year is all the more challenging. The risks we won’t be taking seem to be much easier to list than those that we will, so we’ll start with those. But before we embark on 2018, we should review our predictions for 2017.