Until last Friday, risk aversion was clearly on the rise as the markets were grappling for yet another Greek stalemate, with markets continuing to take cue from the lack of positivity coming out of the Greek debacle.
Risk-on/Risk-off has been the order of the day, and yesterday was testament to this as news over the weekend that the Greek government had handed in proposals good enough to warrant some sort of discussion or lobbying propelled markets significantly higher. And here we mean equities, High Yield and Investment Grade having their fair share of daily trading well “in the green”.
As of today, however, the European IG market has fared the worst, which should not come as a surprise given the extreme sensitivity to core European benchmark government bond rates, and the repricing in the Bund over the past month or so.
The Investment Grade space is clearly exposed to a rising interest rate scenario and could be hence faced with many risks in the near to the long term, but the clear short term risk to this asset class has been the Greek factor. The recent spread widening as such is not related to fundamentals but a macro event that should not really impact European’s corporate credit metrics.
Therefore, there could come a time when the spread widening becomes “too” wide and hence becomes an attractive entry point. But without getting the Greek saga out of the way, spreads could widen further.
One could also argue that credit markets are faced with the so-called risk known as the great rotation, i.e. when investors decide to shift out of credit and into other asset classes.
This temptation could be huge when looking at the divergences of YTD performances between difference asset classes. European sovereign bonds are in trading in negative territory, HY is scraping through whilst equities have been the clear winners to date.
However, we reiterate that from a defensive perspective, credit markets remain the most resilient alternative to weather market downturns and are among the first asset classes to recover.
If, on the other hand, we have a positive outcome to the Greek impasse, equities have the legs to run further, but credits will also benefit on the upside, after which the market will be in a position to shift its focus on macro fundamentals like the economic recovery, earnings season, re-leveraging trends.
On the primary markets, issuance volumes have clearly nose-dived, most notably within the IG space, with only €1.1bn issues last week vs €9.4bn a week earlier, evidence that the market (and issuers) are on edge over the Greek crisis.
Volatility levels in the meantime have subsided in the past week or so albeit we have seen a marked increase in volatility across all major asset classes over the past couple of trading sessions on the hope that a deal with Greek’s creditors will be struck.
Disclaimer:
This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.