Bank Interest Chronicle by Eric Sturdza.
Trompe l’oeil retail sales
Let’s start this column by quoting Talleyrand: “When it’s a given, it’s even better when it’s said.” In fact, that’s the first thought that came to my mind when I discovered the retail sales numbers last Tuesday. We saw a nice +0.9% gain over the month accompanied by a strong revision of the previous month’s figure to +1.4% from +0.5%. What power! Unfortunately, the reality is less striking, because inflation is mainly responsible for these good figures. These are calculated in price and not in volume. Consequently, the sharp price hikes lead us to believe that volume sales are stable at best and falling at worst. Hence resorting to Talleyrand to illustrate our point: let’s not get carried away. It is true that in the not too distant era of zero (or negligible) inflation, retail sales could be interpreted at face value. We have to believe that not everyone is yet adjusted to the new bullish environment as the US 10-year Treasury bond rose to 2.98% from 2.92% when the stat was released to mark the day at 2, 99% close.
The last week was crucial for long interest rates not to breach key levels that would have caused them to plunge back into an uptrend.
Volatility is still high as after breaking above 3% again on Wednesday afternoon we are back down to 2.77% twenty four hours later. So a week for free? Let’s not rush because price action has taught us a lot. Now focusing on the 30-year long bond, it waited a few days for confirmation of a trend reversal, but any attempt to openly move back above 3.13% during the week should have nullified the previous move. The retail sales figure on Tuesday afternoon surpassed the strength of the 30-year-old and the latter settled above the famous 3.13% level and peaked at 3.20% on Wednesday.
So farewell to the trend reversal and return to the bear market? not at all. The long bond fell back to 3% (2.97% Thursday) and leaves us perplexed again. What leads us to believe that we still have a 50% chance (maybe more?) of having seen the worst of the bear market is that the 5-10 year reversal has temporarily returned (-2 basis points yesterday afternoon at 2.83% and 2.81% respectively). ). In summary, the past week has been crucial for long-term interest rates not to breach key levels that would have caused them to plunge back into an uptrend. Initially misread retail sales broke these levels, but for too short a period of time, not enough to clearly confirm a bear market return.
Always attractive spreads
From Single-A 3-5 year USD at 3.70%, BBB same maturity at 4.25%, this really becomes a no-brainer. The EUR market, which has long been neglected due to negative yields, is unbeatable: we favor the BBB 3-5 years at 2% and non-bank hybrids with a yield close to 5%. The latter may benefit indirectly from a potential lack of investor interest in bank AT1 bonds, which are often misrepresented as a competing asset class when they are complementary.
The ECB’s reaction to the AT1 regulatory framework could have a negative impact on subordinated bank debt.
The European Commission has asked the ECB to review the regulatory framework for AT1 and the central bank’s response could have a negative impact on subordinated bank debt. We do not hold AT1s or CoCos for the simple and (only) reason that it is a market of highly specialized professionals in the field. So let’s wait for the response from the specialists before worrying unnecessarily. On the other hand, we have been invested in corporate hybrids for a very long time. We have never put these two markets in competition. Despite some similarities, they are very different and complement each other. They must therefore be placed next to each other and not back to back!
As we’ve mentioned several times over the past month, we’re seeing a renewed wave of investor interest in investment grade. In USD terms, the IG corporate indices have had a disastrous year-to-date performance, around -13% depending on the index. That’s down 3% from high yield, which is down -10% year-to-date. Such behavior of high-quality loans is quite exceptional and anomalous. This is the downside of quantitative easing programs. If the latter stop, the affected markets will suffer both in absolute terms and relative to asset classes that have not been affected by the massive buying volumes of the major central banks. The message is clear: let’s enjoy it, it won’t be long.