Sharing our convictions

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.

Our equity experts from the Quality Growth Boutique are constantly trying to find exceptional companies. In this insight, they explore businesses that may be high quality today that were not in the past. Does the current COVID crisis change the playbook for investors in any way?

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.

Ethnic minorities account for 40% of the US population, 29% of bachelor degrees, but just 16% of Fortune 500 board seats. Sub-conscious bias plays a big role. A structured approach to hiring and mentoring are required for change. Diversity can drive innovation and shareholder returns.

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.

A few weeks ago Bank of America Merrill Lynch’s CEO, Brian Moynihan, said that loan losses were not coming through as thick or as fast as he would normally expect for a recession, in particular a recession of this magnitude.

There have been two topics concerning the yield curve in the press over the last few days, which we think merit closer attention. As regular readers will know, the US yield curve in particular is closely followed by market participants and can dictate a lot of what happens in fixed income markets globally.

Markets opened today to the news that German Chancellor, Angela Merkel, and French President, Emmanuel Macron, had reached an agreement to support the launch of a €500bn support package to aid the European Union’s recovery from the coronavirus outbreak, which has devastated large parts of the continent.

European ABS primary markets re-opened late last week with the pricing of the first publicly syndicated deal since recent events took hold of global financial markets. Long-standing issuer BMW priced a 1.6-year AAA German Auto ABS deal at three-month Euribor +40bp, having increased the size of the deal to €700m and finishing around 1.7x oversubscribed.

Like a pendulum, once equity markets swing one way, they will swing back. Investors can manage market swings by actively allocating to international equities using 3 timeless tactics: diversification, exposure to a unique opportunity set of strong businesses, and buying at attractive valuations.

Thursday saw the reopening of the bond market for bank Additional Tier 1 (AT1) debt, more colloquially known as ‘Coco’ bonds.