TwentyFour

There were sharp declines across global risk assets on Tuesday, led by tech stocks but with barely an asset class left unscathed.

On Monday my colleagues on TwentyFour’s Multi-Sector Bond desk published a blog on rising default risks in high yield credit. Dummen Orange, Douglas, Boparan, Moby, Galapagos and CMC Ravenna are some of the obvious under-pressure names held in loan funds and CLO portfolios that are trading at a significant discount in the market.

A quick look at the dashboard of 16 fixed income indices I track clearly shows the amount of pain experienced by investors so far this year. Of the 16 indices I follow, which include IG corporates, government bonds and high yield all denominated in sterling, euros and dollars, Bank CoCos, £ and € Sub Insurance, three hard currency corporate EM indices and the G7 govvie index, only two had a positive total return for the year at the end of October.

Fixed income managers never like to start their week reading headlines about potential defaults in the high yield sector, but sadly this has been one of those Mondays.

Changes in regulations are typically long and drawn out, but their impact can often be felt quite quickly. There is every chance that this could soon be the case in ABS markets.

After some very negative research pieces – some almost sensationally so – on the affect the wider Italian Government Bond (BTP) spreads would have on Italian banks, yesterday we got to see the facts from Intesa Sanpaolo when it  reported its  Q3 earnings.

As expected, the EBA 2018 stress tests, which were widely reported on yesterday did not have much of an impact on markets generally, although it’s worth looking at some of the stresses.

At TwentyFour our Italian ABS holdings are fairly moderate, and in general our peripheral ABS exposure has been steadily decreasing for some time. This has nothing to do with credit quality, but everything to do with relative value.

A question we have been getting more frequently for from clients in recent weeks concerns US Treasuries, and more specifically how the level of UST issuance (and where along the maturity curve it arrives) will impact yields both in the rates market and further afield in the coming months.

Sadly this is not a review of the new Queen biopic, it’s a eulogy to a bond which was called today that is as well known in the securitisation world as Freddie Mercury is in the real one – Paragon Secured Finance 1 (or PSF 1 as we knew it).

In January 2015, after years of market share erosion and leverage increases, Tesco bonds were downgraded to junk status by Moody’s and S&P, forcing all of Tesco’s debt stack out of IG corporate bond indices in the process.

A volatile last couple of weeks have certainly kept fixed income investors fastened firmly in their seats, with comments from Federal Reserve chairman Jerome Powell suggesting US monetary policy was “nowhere near neutrality” sending shock waves through global rates, credit and equity markets.