Fixed Income

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.