TwentyFour

It seems a long time since the European ABS market saw any meaningful volatility.

Following on from our recent comment on the level of Italian BTPs and how this has a potential to impact the transmission mechanism, it is interesting to note the subtle but important changes that have been applied elsewhere across the global economy.

Nearly 4,000 international ABS market participants attended the Association for Financial Markets in Europe’s Global ABS Conference last week, the biggest attendance since the financial crisis.

Aside from the fact that he is Italian and once served as governor of the Italian central bank there are other reasons why Mario will be concerned at the price action in Italian Government Bonds (BTPs).

After the most hectic week of the year to date, relative calm has at least temporarily been restored to markets.

Clearly the decision by Italian President, Sergio Mattarella, to refuse the appointment of Paolo Savona as the coalition’s Finance Minister, on the grounds of him being overtly eurosceptic, has backfired badly.

During and since the global financial crisis the Federal Open Market Committee (FOMC) has done a remarkable job in navigating the US financial system under extremely challenging circumstances, setting the standard for other central banks to follow.

We are currently of the view that the market panic generated by the plan published by the new Italian government is a bit excessive.

European ABS market performance and volatility have been remarkably stable since 2016, largely weathering broader credit weaknesses so far this year.

After another week of yield curve flattening, we now have the 2s-10s curve in US Treasuries at just 43 basis points.

Paying attention to China will be even more important to investors than usual in 2018.

We have often started our portfolio discussions with clients this year with what we don’t like in fixed income. Unfortunately the list for 2018 is relatively long and quite large when measured on a market cap basis.