Market updates

September new issuance has opened with a bang as we expected. Volumes are high and the issuer types are diverse, with a slant towards more frequent borrowers who tend to have their ducks permanently lined up in order to jump on favourable conditions. We expect this trend to continue throughout September as bankers push borrowers to take advantage of what could be one of the best opportunities they might see this cycle.

With Brexit uncertainty having ratcheted up a number of notches since Prime Minister Boris Johnson sought to prorogue parliament, yet again investor attention is focused on what impact a hard Brexit could have on sterling assets, and how to best protect themselves from associated volatility. Since the Brexit referendum in 2016, our view has been that safely capturing the ‘Brexit premium’ priced into many sterling assets was a way to enhance value for investors. However, we have always had a cautious view on what Brexit could ultimately look like, and currently it seems clear that the chance of a hard Brexit has increased significantly.

Yesterday, the Queen approved a request from the Prime Minister, Boris Johnson (‘Bojo’), to suspend Parliament from 10th September to 14th October. This means that when MPs return from summer recess next Tuesday, they could have as few as four days sitting in Parliament before it is suspended again. The Government have argued that this is following procedure – on average a Parliamentary session lasts a year and then is suspended before a Queen’s speech begins a new session – the current parliamentary session has lasted two years. A new session allows the Government to outline its agenda, as well as resetting quotas for certain mechanisms such as Private Members’ Bills.

The European Central Bank faces quite a conundrum ahead of its upcoming monetary policy meeting on September 12. ECB President, Mario Draghi, has clearly signalled that a cut to the refinancing rate (currently at minus 40bp) is likely and markets are now pricing this in with an 85% probability. The problem is, the ECB has also signalled that it will simultaneously consider tiering the bank reserves this rate actually applies to.

The average yield of the bond market today is 1.46%, while its average duration is 7.05 years, going by the widely used proxy of the Barclays Multiverse Index.

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.

It was a dramatic night last night as the Fed cut interest rates by 25bps, the first cut since December 2008, along with the premature ending to the balance sheet run off – however markets hardly moved!

Over the past few weeks there has been a noticeable increase in high yield new issuance, bringing a welcome flurry of activity to what has so far been a relatively benign year.

The euro area bank lending survey for the second quarter of 2019, released yesterday, suggests European banks are becoming more cautious and beginning to tighten lending criteria to various parts of the economy.

The UK’s political situation, and in particular the harder Brexit stance of the frontrunner for next prime minister, Boris Johnson, has provided the market with a steady stream of headlines over the past few weeks. As a direct consequence sterling is close to 6% off recent highs and domestic credit spreads have also underperformed their European and US peers.

One of the market’s chief obsessions in 2019 has understandably been the shifting stance of the US Federal Reserve in relation to the path for interest rates, with investors now pricing in a 100% chance of a rate cut at the end of this month. Now that the June FOMC minutes, Nonfarm payrolls, Jerome Powell’s testimony to Congress, the June CPI and PPI numbers and the Trump-Xi meeting at the G20 in Osaka are behind us, what is the next set of data that may shed some light on the Fed’s next policy move?

Yesterday we heard from US Federal Reserve Chairman, Jerome Powell, as he testified at the House Committee on Financial Services. Obviously the main focus for markets was to glean any additional information regarding the future timing and path of the Fed Funds rate. However, as important for fixed income investors as the future path for rates is, listening carefully to central bankers can also provide insight into the bigger picture economic environment. My ears pricked up in particular at two important and related topics Mr Powell discussed.

European bond markets can breathe a sigh of relief this morning as Christine Lagarde is poised to be the new president of the European Central Bank, succeeding Mario Draghi in October.

As we approach the end of Q2, a time when the price of currency hedging can typically spike, we have been reviewing the likely changes in the so-called ‘costs’ of currency hedging. I use the term so-called as these are not really costs, merely a differential in short term interest rates, which for some investors can be a gain and for others it will be a reduction in the yield or return of an asset.

This week Jerome Powell and his fellow FOMC members sit down to determine the Fed Funds rate, and despite the expectation of no move, this meeting is going to be very closely monitored with market participants analysing every word of the subsequent comment.

As we wrote on Friday, one of our biggest takeaways from last week’s Global ABS conference was the growing number of prospective new issuers in the market.

This week Asset-Backed Securities (ABS) market participants from across the globe gathered for the 23rd annual three-day Global ABS conference in Barcelona. And this year it proved more popular than ever with over 4,000 attendees (a post-crisis record) made up of issuers, arrangers, service providers, traders, analysts, market regulators, the industry press, and of course investors like ourselves. In particular, we felt the number of issuers represented was noticeably higher than we have seen in recent years.

Brexit deliberations are currently at a standstill in the UK parliament, as are negotiations with EU representatives. The next steps in the exit process are clouded in uncertainty, with numerous options on the table. In this environment, it’s no surprise that investors are still demanding a spread premium for sterling denominated credit, over and above comparable euro denominated issues.

Despite boasting some of the lowest default rates across the global fixed income market, as well as higher yields and greater investor protections than vanilla corporate bonds of the same rating, Asset-Backed Securities (ABS) remains an under-utilised market for many pension funds. TwentyFour partner Ben Hayward outlines five things every investor should keep in mind when looking at this compelling asset class.