Market updates

The Fed maintained its dovish stance on Wednesday and offered very little in the way of resistance to the ongoing rise in US Treasury yields.

For most investors this deal would likely be considered a liquidity position, and at a spread of 15bp this is certainly not the sexiest proposition the European ABS market has to offer, but what is interesting about this latest instalment from the STORM platform is what makes the deal ‘Green’.

The bear steepening of the US Treasury curve has undoubtedly been the story of 2021 so far for fixed income investors, many of whom will have felt the adverse impact of the broad rates sell-off on their portfolios.

For fixed income investors, we think floating rate European ABS bonds could be an allocation consideration to help improve return prospects and reduce volatility.

In a developed country such as the US, a scenario of rising inflation expectations is usually accompanied by a bear steepening across maturities of the underlying yield curve.

Our year-end forecast of 1.50% for the 10-year is already looking very out of date, and it would be a brave person right now to suggest that 2% won’t be touched any time this year as the recovery gets into full flow with the Fed holding its tongue.

Last week UK Asset Resolution (UKAR) announced the sale of its final mortgage loan portfolios, bringing to a close a decade long chapter of state ownership.

In summary things are going quite well, and in this scenario a rise in government bond yields does not necessarily bring about a tightening of financial conditions.

A couple of weeks ago we wrote about Treasuries breaking new ground and the potential for them to go higher as higher inflation expectations gathered pace.

While COVID has been a key source of disruption across multiple facets of our lives, the virus-induced effects have served a useful purpose by accelerating some important business trends that were already underway. We can all agree data proliferation and the continued digitization of the world certainly are not slowing. What's less clear is which companies will benefit.

The Bank of England have just added to the debate about how much of the recent surge in savings will be deployed in the form of consumption as we return to ‘normality’.

Alibaba had hoped to position Ant with a greater emphasis on the “tech” part of the business and the margins and returns that usually accompany that model, but now it clearly could be a much less profitable, albeit still very large and successful, financial holding company. Portfolio manager Brian Bandsma breaks down what increased regulatory scrutiny means for some of China’s large internet companies.

Our end of year view on the 10 year is 1.50, but we could get there a lot quicker - now is not the time to be brave on Treasuries.

The last few weeks has seen healthy issuance in the high yield space, including multiple billion pound deals, the most recent of which, Asda, priced on Wednesday. This was an interesting deal for a few reasons, not least because it is the largest sterling high yield deal of all time

This deal, backed by a £472m pool of owner-occupied mortgages partially securitised in a previous transaction, drew over £1.2bn of orders and was printed 10-30bp tighter than initial price guidance depending on the tranche, reaching pre-COVID tights.

Ultimately, the fact that the Klockner deal is not marketed as a green loan but still includes ESG-related covenants is proof that ESG needs to be integrated into an investor’s credit work as a matter of course, something we have been arguing for years.

We think it is indeed time to begin the search for recovery stories and deleveraging credits in sectors where the execution strategy is likely to succeed.

I think it’s likely we’ll see new cycle tights for the European CLO sector this year, so in addition to healthy income we believe there is plenty of room for capital appreciation as prices are being pushed higher in the secondary market.

We think this current pause in the global rally is healthy and gives investors a rare moment to reassess, but from a fixed income credit point of view we would not expect too much of a dip.

European ABS primary markets have started 2021 at the solid pace that most market participants expected. The market saw a patchy Q4 in which activity petered out early, not helped by the dominant UK market suffering some hesitation whilst tightrope Brexit deal talks went to the wire, but also as a result of a rather more simple fatigue that appeared to have set in.

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

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

The market craves stability and transparency. As an efficient auction mechanism, it relies on visibility to price stocks and economic activity. Typically, the market—and people in general—do not like change, but this time, as we stand at the precipice of a tremendous change, what we are seeing is actually a potential return to real stability, normality and transparency.