FIG market’s irrational exuberance will pop
Economic data will burst the bubble
Markets never move consistently in one direction, suggesting it’s only a matter of time before bearish fundamentals end the six week rally that led the iTraxx Europe Senior Financials index to tighten by 53bp to 97bp on Thursday.
November’s FIG issuance had amounted to well over €60bn by Thursday with two thirds coming in unsecured format, making it a record month.
Demand for the riskiest debt was ebullient, as evidenced by the €5bn order book for Bank of Ireland’s €500m tier two, which was priced 60bp inside guidance with a negative concession and tightened by 30bp a day later.
Duration was flavour of the month, as a series of European national champions collectively raised over €7bn in unsecured deals with tenors longer than 10 years in the last eight trading days.
Credit investors were clearly unperturbed by the euro swap curve, which stood at an inverted 26bp between the two and 10 year points on Thursday, heralding recession.
In the fluffy world of credit make-believe this rally has legs, but rates investors with their feet on the ground say a European recession has not been priced in.
The dichotomy between rates and credit has never been starker. But reality will dawn.
BNP Paribas economists expect the US and eurozone economies to shrink respectively by 0.1% and 0.5% next year, the UK will be 0.9% smaller.
And unlike the Federal Reserve which must safeguard growth, the European Central Bank has only one mandate to contain inflation, which will be running at well over 8% through the first quarter of 2023.
That is the data that those in markets should be thinking about instead of pinning everything on the lower than expected US inflation print earlier in the month.
November’s extraordinary FIG deal flow recalls the now famous words of former Fed governor, Alan Greenspan, immortalised in a book by Yale professor Robert Shiller — irrational exuberance.
Shiller's book outlines the emotional foundation of all speculative bubbles. Credit investors should take a look — they appear to be in one.