The last few weeks have provided some rare stability and tightening in the secondary market for FIG bonds, with less derailment from new supply.
July was set to be the best month this year for bank credit, according to Tom Kinmonth, fixed income strategist at ABN Amro, speaking just before the month ended. “Earnings results took the focus and drove the market,” he said.
But earnings and the long-term improvement in banks’ capital positions have been counterbalanced this year by fears about the new Italian administration’s spending plans and disagreements with the European Union, and the escalating trade disputes between the US and other countries.
Broader financial themes have also damaged sentiment, such as the decline in European growth expectations and the tapering of the European Central Bank’s asset purchasing programmes.
Any or all of these factors could continue to play havoc with the secondary market performance of bonds over the coming months. In particular, the Italian administration is set to present European authorities with its budget.
But Kinmonth argues that investors should hold firm.
“The banking landscape has changed tremendously over the last four years, and bank balance sheet improvements will continue for the next few years,” he said.
“Banks are to have stable earnings this year, and monetary policy will continue to assist the narrative. Furthermore, legacy litigation costs have almost all been paid and restructuring plans are in the mid-to-late cycle,” he added.
Kinmonth therefore prefers the premium offered for riskier credits within the sector.
The outlook was more optimistic than that of JP Morgan analysts, who said this week that volatility will increase in the coming months due to a combination of ECB tapering, rising short end dollar rates, trade disputes between the US and China, Brexit negotiations, Italian politics and the late stage of the business cycle.
Kinmonth did note that Banca Carige could cause market volatility in the autumn. The ECB has told Carige to present a new capital conservation plan by November 30. Its previous plan involved issuing a tier two bond, but this transaction was suspended due to what Carige said were poor market conditions.
Supply drought
Meanwhile, supply has remained muted with just one benchmark deal in euros over the past fortnight, from Goldman Sachs with a €1.5bn deal. The only European issuer with a benchmark-sized deal was Nationwide Building Society, with a $1bn senior non-preferred transaction.
One syndicate banker reported some drop-off in investor interest in non-FIG bond deals this week due to the holiday season. The banker expected FIG issuers could tap existing bonds next week, but benchmark transactions were unlikely in the first few weeks of August.
But given the risks facing the market in autumn, the syndicate thought issuers should be willing to look at the market earlier than usual after the summer break, pencilling in the week starting August 20 as when supply could restart.