The global sovereign bond sell-off continued for a fourth week, this time triggered by renewed plans by US president Trump to introduce big tax cuts. Only the most economically-sensitive and equity-like fixed income sectors, such as bank loans and High Yield, posted gains, while leading US equity indices reached yet another record. Also showing improved confidence, US leveraged loan issuance in September was...
the second-highest in 12 years (read more below). On the other side, long-maturity US Treasuries suffered from the risk-on mode, losing 1.8% over the past five trading days. The US dollar extended the rise it started in early September, hurting Emerging Market (EM) currencies and EM local sovereign bonds. The South African rand lost 1.6% against the US dollar over the past five trading days, also hit by political uncertainty ahead of the ruling African National Congress’ elective congress at the end of the year.
Europe continued to post strong economic data, but the mood and the euro were weakened by an escalation of the tensions between the Spanish region of Catalonia and the country’s central government, following a vote on independence on Sunday that the government dismissed as illegal and that left hundreds of injured on the streets (read more below). In Japan, the yen continued to weaken following president Abe’s calling of a snap election, aimed at strengthening his multi billion-yen stimulus plan to get the country out of a two-decade long recession. So far, Abe’s party is showing a poll advantage, which weighs on the yen.
ON THE RISE
US loans – booming issuance: Issuance of US leveraged loans reached US$1.0 trillion in the first nine months of the year, the highest level over a comparable period since at least 2006. The sharp increase over previous years is due to the better economic prospects, to better capitalised banks that are more willing to lend, and to the fact that more financial institutions are willing to buy some of those loans off banks’ balance sheets – to re-sell them to investors in the form of structured debt. Almost a fifth of this year’s US leveraged loans (or loans to companies bearing considerable amounts of debt) are to Consumer Discretionary businesses, a sign that the US consumer may be in a strong position, with low unemployment, positive growth and low inflation. Reflecting this, this year’s top deals include a communication services provider, a supermarket chain, a computer maker and a global burger brand. Click here to read Western Asset's Michael Buchanan views over potential opportunities in the loan market.
Loan appetite: investors bite the US leveraged loan market
(Leveraged loan issuance for the Jan 1 – Sept. 30 periods for each year since 2006)
Source: Bloomberg Barclays 4 October 2017. Bln is billions, USD is US dollar, RHS is right hand side. Past performance is no guarantee of future results. Please see disclaimers for definitions.
UK – Notice given: Market-implied chances of a rate hike soared to 77%, from barely 16% one month ago, following not-so-subtle hints from Bank of England rate-setting committee members. The warnings came after consumer inflation returned to an annualised 2.9% in August, up from 2.6% in July, a concern that may lead the central bank to hike rates for the first time in more than a decade next month. The expectations lifted the British pound, which is the only G-10 currency to have appreciated against a rising US dollar since Sept. 1, adding more than 2.2%. Investors, though, have not been the only ones to get a notice: while speaking during the Conservative party’s conference in Manchester, a man handed prime minister Theresa May a P45 - the form UK workers get when leaving their jobs. With higher rates and Brexit uncertainty in sight, these may not be the last notices given.
ON THE SLIDE
EM currencies – time for value? Emerging Market currencies have had a torrid September, hit by prospects of higher US rates and a rising dollar. Declining fundamentals have also hurt specific EMs, such as South Africa, which is facing some political uncertainty ahead of the of the ruling African National Congress’ elective congress at the end of the year; and India, where the central bank lifted this week its inflation expectations and cut next year’s growth forecasts. All together, the general EM currency sell-off seen in the past few weeks may offer some value to investors: according to the Bank of International Settlements (BIS) – the bank of central banks - a number of EM currencies are well undervalued: the Argentinean peso is at the front, at about 70% of its value, closely followed by the Colombian peso (74% valued) and the Russian ruble (84% valued). On the other hand, Asian currencies appear the most overvalued: according to the BIS, China’s yuan is 19% overvalued, the South Korean won, 10%, the Taiwanese dollar, 6% and the Philippine peso, 5%. Click here to read more about active investment in EM currencies – an expertise of Western Asset since the 1990s.
Top of the drops: Value investors see potential after EM currency sell-off
Chart shows EM valuations as a percetentage of their full value (100), according to the Bank of International Settlements.
Source: Bloomberg and Bank of International Settlements as of 4 October 2017. Past performance is no guarantee of future results. Please find definitions in the disclaimer.
Spain – tense: Spanish 10-year sovereign bond yields rose to 1.76%, the highest since March, as tensions between Catalonia and the central government escalated over the weekend. The government of the north- Eastern region held a referendum on independence on Sunday, which was dismissed as illegal by Spain’s national government and which left more than 800 injured on the streets. The political deadlock intensified as Catalan officials hinted at their intention to proclaim independence. The euro weakened as, despite improving economic data, Europe’s problems only seem to pile up.
Source for all data: Bloomberg and Barclays Capital as of 4 October 2017, unless indicated.