TwentyFour Blog

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.

With markets now pricing in two cuts in the Fed Funds rate this year, and a 97% chance of at least one cut, once again the FOMC members are at odds with the financial markets.

One of the main drivers of global markets at the moment is the exact status of the economic cycle in the United States, and on a related note, what the Federal Reserve’s next moves are likely to be. One question we are being asked more and more often by investors is whether we think a recession is coming in the US, and if so, when?

Since the result of the UK referendum in June 2016 there has been a noticeable ‘Brexit-premium’ associated with most sterling denominated assets.

Last Friday’s strong US GDP reading for the first quarter has sparked several days of debate between TwentyFour portfolio managers. The 3.2% reading was 100bp ahead of consensus, so a strong beat at the headline level, but the components accounting for it, such as inventory building, suggested the figure was an aberration and likely to reverse in Q2.

Emerging Market (EM) bonds have had a good year so far. While they are not at the very top of the performance table, the hard currency CEMBI (Corporate Emerging Markets Bond Index) is up 5.69% in $ since the start of the year, and the EMBI (Sovereigns) is up 6.32%; not bad at all.

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.

Several times this year we have discussed the benefits of “roll down” in an environment that for fixed income investing is particularly unfriendly. We believe roll down gains will be one of the best ways to protect portfolios in 2018 from the rising rate curves that we have been experiencing so far.

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.