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Euro Corporate Weekly
Macro & Financial Markets Research Hyung-Ja de Zeeuw & Aline Schuiling +31 20 628 3551 Hyung-ja.de.zeeuw@nl.abnamro.com
Spreads tighten in volatile week
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01 May 2015
Correction in Bunds caused by an accumulation of minor reasons coinciding in a short time frame Credit Yields jump but credit spreads have tightened on light supply from the primary market This shows how vulnerable the credit market has become to supply volume Half way through the earnings season the beat:miss ratio stands at 2:1 Eurozone bank lending to Non-Financials continues to improve
Correction in Bunds…
announcement of ECB QE programme. Yields for Non-
There didn’t seem to be one clear trigger for the fierce
Financial senior paper reached a low in March this year, when
correction in Bunds this week. The most plausible explanation
spreads tightened aggressively in conjunction with the fall in
is an accumulation of several minor reasons coinciding in a
Bund yields.
short timeframe. The recovery of the longer-term inflation expectation in the eurozone and the better money supply
Yield for Non-financials are back at February levels
numbers coincided with Bund supply in illiquid markets while
In %
the street was already long positioned. Add to this a handful of
1.5
fears of an early QExit and we have a recipe for a jump in 1.3
yields. We expect to see more of such pockets of volatility in the coming months. As economic growth strengthens and inflation
1.1
0.9
expectations increase, discussions about a possible early QExit will become stronger and more frequent. Meanwhile, supply will dry up after May and the expected scarcity in Bunds will increase. These two forces, QExit fears on the one hand and scarcity in Bunds on the other, will be sources of increased volatility. However, ECB President Draghi will likely continue to dismiss QExit speculation in coming months as underlying inflationary pressures are still weak, while the central bank will want to be really sure that the outlook has sustainably improved. We therefore continue to expect that ECB purchases will lead to acute scarcity of core government bonds. And that Bund yields will fall on the 3m horizon. For our Bund forecast please read our Daily Insight “Is the Bund
0.7
Jan
Feb
Mar
Apr
May
Non-Financials sr Source: ABN AMRO Group Economics, Bloomberg
…but spreads have tightened The jump in yields almost conceal the fact that credit spreads have actually tightened this week, although on thin flows. In fact, in a week in which most equity indices experienced losses, it was a very good week for credit spreads. Spreads for Non-Financials tightened 6bps and hybrids 23bps. The tightening was supported by low supply from the primary market. Corporates prefer to stay side-lined in times of high
bubble bursting?”.
volatility. On top of that, many corporates are currently in their
…cause credit yields to jump
This shows how vulnerable the current credit market has
black-out period and can’t issue bonds.
The aggressive move in Bunds pushed credit yields up to levels last seen in the end of January just after the
Insights.abnamro.nl/en
become to supply. We don’t expect the pace of new issuance to return to the levels we’ve seen during the end of February
Bloomberg: ABNM