Investors have rightly been concerned about the coordinated global economic slowdown, but in Europe it has been worse than that with the major economies flirting with recession. Consequently investors have been cautious on European assets, but has this caution now reached its peak?

Over the past couple of quarters we have been inundated with questions regarding the banking sector, and in particular how it will perform should the current economic cycle deteriorate.

We wrote a blog a month ago, “January: the Month of ABS-tinence”, about the level of new issuance in the European ABS market, and the slightly counter-intuitive impact it was having.

Investors decided fairly early this year that, with the help of a dovish Federal Reserve, the big negative move of Q4 2018 was not signalling the beginning of the end, and was instead a dip to be taken advantage of. The rally since has barely paused for breath, with a sustained and broad-based recovery taking hold.

One of the elements we look at on our dashboard that guides us on the state of the economic cycle is credit rating migration. We look at spread movements too, but rating change gives us another line into the risk that rated entities are taking or are confronted with. While we recognise that rating change is a backward looking indicator, viewed in conjunction with other measures, it is possible to draw some important conclusions.

The big monetary policy event over the month was the increase of monetary stimulus announced by the ECB after two years of slowly weaning the Eurozone off extremely easy money. At the ECB meeting of Thursday the 7th of March Mario Draghi announced the introduction of new TLTRO (the last round ended in December 2018, so this is TLTRO III) and interest rates guidance was modified for the current levels to remain to the end of 2019 (previously mid 2019). Market consensus is for an even longer pause.

he first quarter of 2019 is coming to an end and after a bumpy end to 2018 we did not expect to see a lot of issuance of new CLOs once the pipeline had cleared. But although CLO debt remains expensive for equity investors (arbitrage has only gotten worse as the leverage loan supply is still slow) there seems to be no end to new deals coming to the market. There are a few things that for us as debt investors stood out; the strong Japanese bid for AAAs, structural differences, varied pricing and spreads that have not recovered as quickly as for similarly rated corporate bonds.

The period following the full year results releases from the banks is typically followed by large volumes of subordinated bond supply from the banks. This year is no exception as the pace of new issues is ramping up, in particular in the higher beta Additional Tier 1 (AT1) securities; colloquially known as Coco bonds. Already this week there have been new benchmark issues from BBVA, Barclays and BNP, taking 2019 issuance to date in this sector to a total of €14 bn.

The big question for us now is how long the impact of the virus may last, and how much of a supply and demand shock will there be as a consequence of the various efforts to stall its spread.

One of the challenges that banks face when considering the re-financing of AT1 capital is market timing. Treasurers have to answer the question whether to issue when market conditions are supportive, which may result in a considerable period when they have two overlapping securities (adding to their interest overhead); or wait to refinance just before the call date, which of course increases the risk of having to issue in a market demanding more punitive terms.