TwentyFour

If we look at the main drivers of returns in Q1 2025, the first one that comes to mind is tariffs. But while this is true for equities and credit spreads, in the context of global fixed income the main driver of total returns in Q1 was the Bund sell-off triggered by a momentous shift in German fiscal policy.

With the recent economic spotlight dominated by President Trump’s rhetoric and Germany’s blockbuster fiscal expansion plans, Wednesday brought the UK back into focus with the latest round of inflation data and the Spring Statement from the Chancellor, Rachel Reeves.

Contentious call decisions from high profile issuers can provoke a fair bit of debate and emotion among participants in the Additional Tier 1 (AT1) market, and Deutsche Bank has put itself in the spotlight by announcing it will be calling only one of two AT1 bonds approaching their call dates.

Last week we wrote about a notable shift in market sentiment and how this had impacted our view of relative value within fixed income. So, where has the impact been felt, and has it changed our view on relative value?

Following the introduction of the European Union’s securitisation regulations in 2013, the Australian securitisation market initially lagged behind in aligning with European investors’ standards. Over the past decade, however, the market has undergone significant changes and recent record issuance shows investors are increasingly seeing the opportunity in Australian ABS.

Volatility in Bunds seems to have calmed down slightly in the last few days as markets continue to digest huge fiscal expansion plans from Germany and the European Union. At the same time, many forecasters have been downgrading their US growth projections after reassessing the level of pain President Trump seems willing to inflict on the US economy in order to implement his policy agenda.

With the UK’s Office for Budget Responsibility (OBR) set to publish its updated economic and fiscal outlook on March 26, we are starting to see headlines concerning potential changes the Labour government could make to its budgeting plans in response to shifting forecasts.

European government bonds have sold off sharply this week in the wake of Germany’s market-moving fiscal measures, while European equities, especially those of banks, have moved in the other direction.

Overnight, the CDU/CSU (the winner of the latest German election) and the SPD (the leader of the current parliament set to end on March 25) announced Germany’s largest fiscal policy shift in decades.

Last week, risky assets continued to experience a somewhat volatile period. The tone was generally a risk off one, with correlations between risk free and risky assets back to negative.

The Additional Tier 1 (AT1) primary market has begun 2025 with a bang, with a sterling perpetual non-call seven transaction from NatWest that hit the screens on Wednesday morning set to take issuance over €16bn equivalent year-to-date, more than double the volume we have seen over the same period in each of the last five years.

European banks‘ full year 2024 reporting season has now largely come to an end, with only a handful of issuers still to report over the next few weeks.