Market updates

The tweak that we will read so much about with respect to the inflation goal is that the new policy can be viewed as a “flexible form of inflation targeting”, meaning that following periods when inflation has been running below 2pc, appropriate monetary policy will likely aim to achieve inflation moderately above 2pc for some time.

Given most countries are going through the same issues and their fiscal expansions are justified, the relative value has not changed that much.

Yesterday we showed that for European investors, what we speculated on back in March has come true; that the bond market did recover its losses far more quickly than equities, as shown below.

A trend of negative ratings migration has historically been a consistent precursor for a pick up in the default rate of publicly rated debt.

The clear opportunity within IG credit from our perspective, without having to take excessive risk, is to buy legacy Bank and Insurance IG debt.

With BP slashing its dividend this week, we have now seen 52 of the FTSE 100 companies suspend or cut their dividends this year. 

As expected the Monetary Policy Committee (MPC) kept UK base rates at 0.1% and maintained their current level STG IG corporate bond on the BoE balance sheet at £745bn, with no immediate expectations of a need for further stimulus.

This week we are right in the middle of the European banks’ Q2 reporting period. Today for example we had results from a diverse group of Europe-listed banks, with Credit Suisse, BBVA, Lloyds and Standard Chartered all reporting. All have very different business models and footprints across varying geographies.

Coventry Building Society today priced a well-received £350m 2.5 year UK RMBS deal, and by using a Master Trust style structure (historically the preserve of only the largest UK banks) the issuer has beaten its own path to joining the big leagues of RMBS.

As more government bond curves around the world join the select group trading at negative yields, we are seeing a spike in ‘Japanification’ headlines in the press.

Earlier this week, Moody’s published its default study for June, which showed that as expected, default rates globally have started to pick up as a result of COVID-19. The trailing 12-month global high yield default rate reached 5.4% at the end of June, up from 4.8% in May, as the gap to the long term average of 4.1% continues to grow.

As we enter Q2 earnings season, we will be most interested to learn how Corporate America has fared over the past three months.

Ultimately, while Q2 will be a bad quarter for many companies even if they outperform expectations, in our view it is not the real driver of spreads at this stage.

Today BBVA announced it would be issuing the first ever green Additional Tier 1 (AT1) bond, a perpetual non-call 5.5-year with initial price thoughts at 6.5%, and immediately sparked a spirited debate among the TwentyFour team over how green bank capital can be.

Like many market participants we are looking ahead to a much anticipated Q2 reporting season, which is even more pertinent this year given the unprecedented environment we have all found ourselves in. We are particularly interested in reviewing the major banks given they are at the centre of the transmission mechanism and hence a barometer for the wider economy.

One topic that is beginning to gather headlines again is the terms of any bilateral agreement between the UK and European Union once Brexit is finally completed at the end of this year, with the latest round of negotiations breaking up a day early this week as both sides said they were still far apart on a number of issues.

After the most incredible first quarter of 2020, we have seen an almost equally incredible second quarter. It is clear to us that the market overreacted in March, but it has also overreacted in its interpretation of the recovery.

The dust is beginning to settle in the UK economy, and we have been busy using granular RMBS data to assess the impact of mortgage payment relief (payment “holidays”), which the Financial Conduct Authority guided lenders to offer borrowers affected by COVID-19.

The European high yield market has shown remarkable resilience in the face of what will likely go down as one of the sharpest and most severe recessions in history. The benchmark iTraxx Xover index (a widely used proxy for Euro HY credit risk) has tightened from an intraday high of 730bp in March to 342bp earlier this week, a retracement of almost 75% from the January lows of approximately 200bp.

On what was a very busy morning for new issues, AIB probably came with one of the most interesting, announcing a €500m Additional Tier 1 (AT1) deal with a 5.5-year maturity with initial price thoughts of 7%, though we expect this will be tightened as the order book builds.

Today’s Federal Open Market Committee (FOMC) meeting in some way represents a big step towards normality for investors, as they await what the Fed will do next having returned to its scheduled programme of meetings. So what can we expect from the Fed today?

Given the steep, uninterrupted rally we have witnessed since the end of March, we think it is a good time to reassess how much value is left in fixed income markets, if any.

In the past few weeks CLOs have become the focus of much attention, both from market participants and the media, especially following the negative rating actions that agencies have taken on the underlying loans as well as CLO tranches.

As regular readers of this blog will know, TwentyFour has adopted ESG integration throughout its investment process for all strategies, and launched its first sustainable fund offering in January 2020. In doing so, we have engaged in some fascinating debates with clients and peers about the growing impact of ESG objectives on the fund management industry, and on fixed income markets in particular. Here are a few of our predictions for the years ahead.