One of the key things to understand about a post-accommodative policy world is that it by definition means the return of price sensitive investors.
Indeed, one of the key questions as we enter a not-so-brave new world is who’s going to mop up the supply central banks aren’t taking down? and, perhaps more poignantly, at what price?
This has obvious implications for rates and you also have to ask whether, and to what extent, EM FX managers will or won’t be in the game as that’s another source of perviously insatiable price insensitive demand that disappeared in 2015 in the wake of the petrodollar’s untimely demise and the Chinese effort to control the pace of the yuan deval.
So with all of that in mind, consider the following from former FX trader Richard Breslow who isn’t as furious today as he was on Monday…
If there’s one lesson we should have learned but only seem to when it jumps up and bites us is that “we are not alone”. And I’m not talking about alien life forms, which I’m sworn not to give you details about. Rather, as we ponder the notion of a global regime change in monetary policy, and rates more broadly, it’s a big mistake not to consider that at some point issuers will be fighting to tap into a far more selectively inclined investor base. And no market should be analyzed in isolation.
- We’ve been debating non-stop about the back-up in rates. So far and so fast. All of a sudden central bank speak has taken on a decidedly different tone. But consider the fact that yields have done this during a period when new issuance has been on the light side. And that’s about to change. It’ll be an important test
- After several light weeks, investment grade and sovereign syndications are all coming back to market. And that doesn’t even take into consideration the usual slate of government offerings, like this week’s 3s, 10s and 30s from the U.S. And just wait until the big bank blackout period ends after earnings and they all come a-calling. After all, they have share buybacks to finance. I may be early in focusing on it, but take a look at how much debt matures at the big banks over the next 18-months
- It’s important to also note that while IG is back, high- yield has gone comatose. It may be indeed the case that blemishes are sneakily, and finally, becoming a factor because while the HY calendar is largely empty, the Bloomberg Barclays US IG Corporate Bond Index OAS traded yesterday at its tightest level since Sept. 2014
- If you couldn’t sleep last night and were watching the price action, you couldn’t help but be impressed how much in lock- step sovereign curves were moving. Or the fact that the weak side of the market seemed to clearly tilt toward the higher rate side. And why not, issuance is coming from every part of the globe
- When yields rallied yesterday, there was an all too familiar refrain along the lines of, “I knew it was overdone.” Who couldn’t see the value of 10-year Switzerland at a basis point? Currency traders were smarter than that and have put EUR/CHF into play
- The issue, as I see it, is that two things can happen. The world can go back into the sewer and rates are a buy. Or we have just begun the arduous task of getting rates closer to sane levels. We’ll see how much of these moves is concessions and how much bigger picture related. But at some point, concessions can become capitulations. At some point distributing bonds may not resemble giving out candy to deserving investors but require a well thought out use of funds section