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Wednesday, 20 March 2019

IFR SSA Special Report 2018

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Rising interest: Investors have long been bemoaning the fact that returns have been way lower than they would crave, especially in the rarefied realms of the public sector. Signs now, however, are of a move towards ‘normalisation’ as far as interest rates are concerned, although there are suspicions in a number of quarters that some are beginning to think they should have been more careful what they wished for.

The US is leading the way, with the FOMC’s March quarter-point rise in the Fed funds rate the latest step on a tightening route that still has some way to travel. But the eurozone and the UK are following in its wake, with Japan also set to join the growing list of countries around the globe signalling a tightening of monetary policy.

But removing the crutches market participants have become used to leaning upon for so long is unlikely to lead to a seamless transition to a brave new world where everything reverts to pre-crisis norms.

The very prospect of rising rates and the removal of quantitative easing measures has already seen the high-flying confidence previously prevalent across many parts of the market dissipate to some degree.

True, higher yields will go some way to returning to more typical levels, although the consequence could be that asset classes away from those that verge on the ‘risk free’ find investment streams more difficult to attract. The very sector that is supposed to most resemble a sea of calm is beginning to set an agenda that looks anything but calm.

But for those in the upper echelons of the credit spectrum, capital will be available, just as it has been, even if not at the same eye-wateringly tight levels.

There will remain a loyal hardcore investor base, although prospective issuers could do worse than keep their options open when it comes to approaching the market and look to diversify with a view to maximising future access.

Green bonds, for example, finally appear to be offering governments an alternative source of funding – one that those in the sub-sovereign stratum have long since utilised. Following their trailblazing lead has been a while coming, but the asset class can at last claim to be credible in its own right.

A move away from parochial reliance will also continue to maximise opportunities, with alternative markets such as Kangaroos, Kauris and Formosas offering welcome – and necessary – diversity.

But it is not just the sellside that needs to look at pastures new. Investors, too, will have to spread the net wide, although increased international issuance from parts of the globe that have not recently offered so much in the way of prospects will ensure that there will be something for everyone.

To see the digital version of this roundtable, please click here

To purchase printed copies or a PDF of this report, please email gloria.balbastro@tr.com

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