The TwentyFour Blog

There has been a bit of nervousness to say the least in US money markets over the last few days. The overnight repo rate in dollars surged to levels not seen since the aftermath of the financial crisis, touching almost 10% on Tuesday. During the financial crisis the high dollar repo rates were a clear sign of trouble in the banking system, so it’s natural that investors might be uneasy about this. We should stress upfront that this is not the case today, the spike in the repo rate is a short term technicality created by a confluence of events, none of which should be worrisome, but in which in aggregate created a shortage of dollar cash in a short space of time and over a very short period.

Regular readers of our blog will know that in the world of additional tier 1 (AT1), the Nationwide Building Society has been one of our favoured issuers in the market. We held the old sterling Nationwide 6.875% perpetual bonds from launch in 2014, and were not in the least surprised when the issuer called the bond at the earliest opportunity in June, though it did leave us a gap to fill in the subordinated bank sector.

At TwentyFour we regard ‘momentum’ as one of the most underestimated factors in promoting progress on environmental, social and governance (ESG) issues. Our view is capital markets should support rather than shun a company if it has a credible plan to improve in a key area or areas.

Yesterday we most likely witnessed Mario Draghi’s last monetary policy package. The European Central’s next meeting on October 24 will be the president’s last, and given the extent of the measures unveiled on Thursday it is looking like a non-event.

Alongside the usual unveilings at the Frankfurt Motor Show this week, one bit of automotive news that piqued our interest yesterday was Moody’s downgrading Ford to “junk” status, assigning a Ba1 rating to the company’s debt with a stable outlook.

National Grid plc, which has been squabbling with UK energy regulator Ofgem over the maximum fine applicable for a series of blackouts on August 9, has compounded its problems with what we would call “unsparing” use of the terms and conditions in its own bond documentation, which disadvantaged holders of its hybrid debt to the tune of €4.8m.

September new issuance has opened with a bang as we expected. Volumes are high and the issuer types are diverse, with a slant towards more frequent borrowers who tend to have their ducks permanently lined up in order to jump on favourable conditions. We expect this trend to continue throughout September as bankers push borrowers to take advantage of what could be one of the best opportunities they might see this cycle.

With Brexit uncertainty having ratcheted up a number of notches since Prime Minister Boris Johnson sought to prorogue parliament, yet again investor attention is focused on what impact a hard Brexit could have on sterling assets, and how to best protect themselves from associated volatility. Since the Brexit referendum in 2016, our view has been that safely capturing the ‘Brexit premium’ priced into many sterling assets was a way to enhance value for investors. However, we have always had a cautious view on what Brexit could ultimately look like, and currently it seems clear that the chance of a hard Brexit has increased significantly.

Yesterday, the Queen approved a request from the Prime Minister, Boris Johnson (‘Bojo’), to suspend Parliament from 10th September to 14th October. This means that when MPs return from summer recess next Tuesday, they could have as few as four days sitting in Parliament before it is suspended again. The Government have argued that this is following procedure – on average a Parliamentary session lasts a year and then is suspended before a Queen’s speech begins a new session – the current parliamentary session has lasted two years. A new session allows the Government to outline its agenda, as well as resetting quotas for certain mechanisms such as Private Members’ Bills.

The European Central Bank faces quite a conundrum ahead of its upcoming monetary policy meeting on September 12. ECB President, Mario Draghi, has clearly signalled that a cut to the refinancing rate (currently at minus 40bp) is likely and markets are now pricing this in with an 85% probability. The problem is, the ECB has also signalled that it will simultaneously consider tiering the bank reserves this rate actually applies to.

The average yield of the bond market today is 1.46%, while its average duration is 7.05 years, going by the widely used proxy of the Barclays Multiverse Index.

Rates risk is not something we concern ourselves with too much in the European ABS market, so normally news of inverted yield curves and 30-year US Treasury yields dropping below 2% would largely wash over us. This is because pretty much all ABS bonds are floating rate, so there is no duration. Or is there?