Abn amro eur corporate weekly 2015 05 01 spreads tighten in volatile week

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Marketing Communication

Group Economics

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

DISCLAIMER: This report has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead. This report is marketing communication and not investment research and is intended for professional and eligible clients only.

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


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