TwentyFour Blog

One of the market’s chief obsessions in 2019 has understandably been the shifting stance of the US Federal Reserve in relation to the path for interest rates, with investors now pricing in a 100% chance of a rate cut at the end of this month. Now that the June FOMC minutes, Nonfarm payrolls, Jerome Powell’s testimony to Congress, the June CPI and PPI numbers and the Trump-Xi meeting at the G20 in Osaka are behind us, what is the next set of data that may shed some light on the Fed’s next policy move?

Yesterday we heard from US Federal Reserve Chairman, Jerome Powell, as he testified at the House Committee on Financial Services. Obviously the main focus for markets was to glean any additional information regarding the future timing and path of the Fed Funds rate. However, as important for fixed income investors as the future path for rates is, listening carefully to central bankers can also provide insight into the bigger picture economic environment. My ears pricked up in particular at two important and related topics Mr Powell discussed.

European bond markets can breathe a sigh of relief this morning as Christine Lagarde is poised to be the new president of the European Central Bank, succeeding Mario Draghi in October.

As we approach the end of Q2, a time when the price of currency hedging can typically spike, we have been reviewing the likely changes in the so-called ‘costs’ of currency hedging. I use the term so-called as these are not really costs, merely a differential in short term interest rates, which for some investors can be a gain and for others it will be a reduction in the yield or return of an asset.

This week Jerome Powell and his fellow FOMC members sit down to determine the Fed Funds rate, and despite the expectation of no move, this meeting is going to be very closely monitored with market participants analysing every word of the subsequent comment.

As we wrote on Friday, one of our biggest takeaways from last week’s Global ABS conference was the growing number of prospective new issuers in the market.

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.

In the ABS market we often refer to the technical around supply and demand which can influence the direction of spreads as a consequence.

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?

Earlier this year Santander became the first bank not to call its Additional Tier 1 (AT1 or ‘CoCo’) bonds at the first call date