Corporate Treasury Weekly: 11 March 2021

March 11 2021

Giles GaleHead of European Rates Strategy

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Breaking down trending trades & themes to help corporate treasurers get ahead of the latest issues shaping markets.


The big picture

Bond yields stabilised a little over the past week as large central banks (primarily the Fed) held their nerve against a backdrop of increasingly elevated rates – but it looks like the European Central Bank (ECB) will be the first to blink. Meanwhile, a combination of huge fiscal expansion in the UK & US, broadly strong economic data and coronavirus vaccine progress all point to a recovery in business activity (and potentially, higher inflation) and strong credit conditions.

This week in headlines

  • Recovery momentum remains strong, boosted by very strong fiscal support in the UK and US: economic & survey data continues to surprise positively – the February US payroll report for instance showed job growth far exceeding consensus (and our own) expectations – and a large fiscal impulse in both the UK (via the 2021/22 Budget) and the US (via the likely passage of Biden’s flagship stimulus package) bolsters our confidence in the economic recovery. But a huge fiscal injection and rising business activity also risk sending inflation higher.
  • Rates remained volatile but we expect the stabilisation to continue: it has been a dramatic month in which bond rates rose substantially across regions, and most central banks, which so far don’t seem overly concerned that higher inflation justifies quick intervention, have declined to resist the rise (sending rates yet higher). That said, the ECB announced this week it would speed up pandemic bond-buying to help tame rising yields. Our base case is that bond rates will continue rising through 2021, but in the near term, markets will stabilise (with bouts of volatility) as they grow more comfortable with the prospect of stronger growth and higher (but not dangerously high) inflation.
  • Credit demand remains strong despite widening bond spreads and rising inflation risks: credit spreads are broadly slightly wider than in late February but remain at historically tight levels, and don’t seem to be a drag on firms looking for financing against a backdrop of a strong funding environment – especially as pension funds, insurers and bank treasuries remain keen on the asset class and have cash to deploy. 
  • But investors in primary markets are starting to look for more yield: investors are starting to look for a pickup in the form of higher new issue premiums (mainly for longer-dated funding), as cash that was available for immediate deployment earlier this year has been absorbed by borrowers. We also expect more focus on how far bond pricing moves from initial price talk, which may lead to increased investor price sensitivity in book-building.
  • Coronavirus trends remain encouraging with infection rates declining in most regions – but France is the one to watch: vaccination programmes continue to show encouraging signs that pressure is reducing, and vaccine deliveries to the EU have picked up & should accelerate sharply from April. France, which is trying to contain the spread of the UK variant, is the main large country to watch.
  • The Financial Conduct Authority (FCA) confirmed timings around the cessation of LIBOR across major currencies: as predicted back in November, the FCA confirmed LIBOR is to end with a cessation date of immediately after 31 Dec 2021 for all sterling, euro, Swiss franc and Japanese yen LIBOR settings and 1-week & 2-month US dollar settings, with remaining US dollar settings ending 30 June 2023.  With this announcement, the widespread adoption of fallback rates, an emerging solution for non-linear referencing ICE Swap Rate, and some explicit ‘no new trading’ milestones, the path for derivatives is becoming fairly clear – but the one remaining unknown in the LIBOR endgame is the speed at which active transition of legacy derivative portfolios will occur.

Trending treasurer trades 

Higher volatility has been driving discussions on cash management and bond buybacks

As we wrote last week, there is increased interest amongst those who thinks rates may be peaking near-term in using “swaptions” to lock in lower funding costs than could be achieved at the time of issuance (without missing potential future rate rises). Cash management and even bond buybacks have started edging up the treasury agenda as corporates look for other ways of capitalising on higher volatility in key rates markets.

US-based issuers look to euro funding for further diversification

Reverse Yankees – bonds issued in foreign currencies by US companies outside the US – have emerged as a key theme over the past week, with highly-rated US companies raising funding in euros, attracted by the diversification (in some cases to fun European operations) and low all-in pricing on offer in the euro market.

Chart of the week

The Euro area Sentix confidence indicator – which reflects investor confidence in the region – rose to 5 in March from -0.2 last month, its highest level since Feb 2020, higher than its long-term average and consensus expectations (and notably, back to pre-pandemic levels). 

Investors see brighter prospects for the euro-area

Sources: Sentix, NatWest Markets
The improvement is consistent with our view that investors expect a swift recovery in activity in the coming months, thanks to the vaccine roll out, pent-up demand, and supportive economic policies – in line with our own expectations and GDP projections.

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