Well, Emmanuel Macron’s landslide runoff victory over far-Right firebrand and Nazi who thinks she can dance to classic American rock, Marine Le Pen, might have been a “sell the news” event, but his first round triumph was bought with a vengeance.
And while most folks have focused squarely on equities, collapsing vol, and the euro, BofAML’s Barnaby Martin is out on Tuesday with a look at what the last “fortnight” (if you’re an American, you’ll probably need to Google that) has meant for credit.
Well guess what? In many respects, Macron > Draghi.
To wit, from BofAML…
Party like it’s QE all over again
The past fortnight will be dubbed the “Macron Rally”: investment-grade cash bond spreads are 14bp tighter, high-yield spreads are 45bp tighter, bank LT2 spreads are 30bp tighter and liquid iTraxx indices have likewise ripped… The “Populist Pause” narrative has given a legitimate boost to spreads.
”Frexit” risks have been put to bed, and the election calendar in Europe now looks a lot less disruptive for the remainder of 2017. For credit investors, the “wall of worry” has simply shrunk. And yet – in relative terms – these credit market moves are stunning…in fact, QEesque in places. Chart 2 shows the 2w rolling spread change, in percent, for parts of the corporate bond market. For single-Bs, where spreads are close to 100bp tighter in a fortnight, the extent of the move has been on par with the CSPP announcement of last March. The “Macron Rally” of 2017 has trumped the “Draghi Rally” of 2016.
The tightening has been a lot more than we had been expecting, especially with the market having only sold-off moderately prior to the elections. But the rally has been turbo-charged by the mismatch of demand and supply in the credit markets lately. IG issuance over the last 3w has been less than €10bn, as election noise has encouraged issuers to postpone funding. The upshot of this is that there has been a “grab-a-thon” for secondary bonds, by both investors and the street, as everyone has scrambled to cover shorts (and to try and muscle the ECB out of the way at the same time). Thus, spreads have squeezed dramatically tighter.