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Monday, 23 October 2017

Osborne ready to announce 'steady as she goes', unlike the credit markets

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After a very quiet Monday, Tuesday was quite the opposite in European credit markets and a pretty sight it was not. There were new issues oozing out of all orifices which ended the day competing with each other to be the underperformer of the day.

Anthony Peters, SwissInvest Strategist

I think it is still a bit too early to declare the end of the boom in credit markets but this was the second time in two weeks when a wild free-for-all has ended in tears.

There is no sense in harping back to the days of shelf registrations and managed issuance timetables, but I get an increasing sense that the evermore rigorous enforcement of Chinese walls between syndicate departments and the buyside is leading to a disconnect which the actual syndication process had been invented for to avoid.

Syndicate departments are now solely concerned with the supply side of paper (or demand side for money, if you prefer) and the way in which prices are formed is more to be likened with an auction process than anything akin to the old underwriting business.

However, as the European sovereign bond markets have demonstrated and also taken on board, auctions are all fine and dandy in bull markets but can go horribly awry if demand begins to wane. Some of the weaker sovereigns – and not only they – have tried to reduce their dependency on auction-based operations and debt management offices across the continent have learnt to listen to the markets and to gauge demand and pricing accordingly.

Meanwhile, in the investment banks, the skills and experience to do anything other than hang paper out of the window and to wait for the ravening hordes to rip it out of their hands at any price have been diminishing. In fact, I understand that direct contact between syndicate managers and buyside clients has been all but banned in some quarters.

Buyers’ market on the rise

While demand was one way only which – the 2007–008 hiccup excepted – it has been for nigh on 15 years, the process of distributing paper became somewhat out of control and random. I am not trying to say that the game is entirely over but as asset allocation to fixed income decreases – and decrease it will – then the process for syndicating credit deals will need to become more sensitive to buyers. I have seen buyers’ markets in the past and I think I can detect one beginning to develop here again.

Looking at the European issue list of yesterday, Anglo American and EDF seem to have done OK – if you’re happy to see a one or two basis point tightening as being OK. But Fiat, Daimler and Vinci all drifted around as though they had been ordered but not collected. Performance can be found in the financial space where markets have been uncertain and where paper is still relatively cheap.

My eye was drawn to a retail targeted five-year Bank of America deal which came in the US on Monday at +275 and which closed yesterday at +264/261 as well as the two tranche deal for AIG at three years and five years which took off like a rocket, tightening by 7bp and 5bp respectively. For the record, the minimum piece on all three of these is US$2,000. For Fiat it is €100,000 although I must concede that the Daimler does trade in increments of €1,000.

Transparency vs secrecy

The credit markets have had more than their fair share of the blame for contributing to the financial crisis and the authorities have been like a rat up a drain-pipe in clamping down on them. However, I am prone to believe that regulation should not be tightened but loosened and this making the arcane world of bonds more accessible to Joe SixPack, not less. Syndicates should fight for more transparency and not less but as in all walks of life, secrecy is a wonderful thing if you are on the inside and building myths and mysteries becomes an end in itself. All the while, investors will pay the price of owning deals which don’t perform. Not a happy place.

The economic reality remains tricky and the less he [Osborne] fiddles around, the better      

Today sees Chancellor of the Exchequer George Osborne present his budget for 2012. I’m not sure why he has to waste his time doing it for as far as I can tell more or less the whole thing has been leaked already. It is very much a “steady as she goes” budget with a bit of tinkering at the top and a bit of tinkering at the bottom, but in the most part the key strategies remain the same.

Osborne continues to struggle with his image as a bit of a “Toff” and the opposition will play on that for all it’s worth although those who know him point out that he is London born and bred and therefore a long way away from the mainstay rural hang ’em and flog ’em Tories. In fact, he is probably one of the most liberal minded of senior Conservatives. Anyhow, he will be applauded by his own side and castigated by the opposition, irrespective of what he says at today’s set-piece punch-up. The economic reality remains tricky and the less he fiddles around, the better.               

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