We want to find out more about you. Please answer two quick questions to help us improve your website experience.

Take the survey

Corporate Treasury Weekly: European credit gains, US & UK rates risk rising & sustainability grows among high-yield borrowers

18 March 2021

Giles GaleHead of European Rates Strategy

View bio

Other insights

View more insights

3 minute read

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

The big picture

The European Central Bank (ECB) went against the grain last week in signalling it would speed up asset purchases to tame rising bond yields, a significant move that will likely lead to lower rates in the short term – a positive development for European credit & risk assets in general and high-yield bond issuers specifically. This week, the Federal Reserve and the Bank of England met and as expected, both declined to change their stance on rising rates.

This week in headlines

  • The ECB’s pushback on higher rates brings near-term positives for European credit (and issuers): The ECB’s intention to “significantly” accelerate asset purchases and push back on rising yields should meaningfully change investors’ perceptions of risk-reward, lead to lower volatility and attract new buyers into the market – which is positive for euro-denominated issuers. While we still think rates will be allowed to lift higher as we move through the year, we now see rates stabilising or even falling a little in Europe near-term.
  • But don’t expect the same in the US and UK: The Federal Reserve and the Bank of England met this week and their stance towards higher rates was a key focus. In contrast to the ECB, both declined to change recent guidance that a rise in rates is justified by the economic outlook (which appears to be improving in both countries). This may lead to higher volatility and upward pressure on yields in the near-term.
  • US rates stabilise but risks remain as markets and the Fed diverge on inflation risks: A large & well-supported US treasury auction last week has boosted investor confidence and helped US rates stabilise. But risks remain, as the way the markets & the Fed see inflation risks has diverged – and more evidence in the form of economic data is needed to close the gap and unlock that fundamental tension. Against this backdrop, US credit investor sentiment may be waning – investment-grade (IG) credit spreads have recovered somewhat but total returns on the year have been poor (down ~6% year to date on the Iboxx USD Liquid Investment Grade Index, an index of investment-grade US dollar corporate credit).
  • Monetary, fiscal policy, vaccine differentiation and more risk appetite are the key themes in FX this week: we see the euro continuing to fall against Sterling and the Scandinavian currencies, while more positive risk sentiment around the US (and more broadly) seems to be pushing the US dollar higher against safer havens like the Japanese yen and the Swiss franc. An improving commodity outlook also seems to be favouring commodity-linked currencies like the Aussie & Canadian dollar, the Colombian peso and the rouble.

Trending treasurer trades & talking points

ECB support is positive for high-yield issuers as IG investors broaden their horizons

The ECB’s acceleration of QE over the coming quarter is helpful, but not a game changer, for IG credit, whose spreads are already at or near to record tights. But greater impact is likely to be felt in crossover and high yield markets (particularly BB-rated paper). Although the ECB does not buy bonds directly unless they have at least one IG rating, the impact cascades as IG investors broaden their demand in order to pick up yield in lower-rated names. This helped drive the outperformance we saw in the BB market on the back of the ECB meeting last week.

Sustainability-linked bonds (SLBs) are gaining traction with non-IG borrowers

The European high-yield bond market saw the first sustainability-linked bond (SLB) issuance last week, a sign that the format is starting to gain traction down the credit curve. Public Power Corporation sold a €650 million SLB at 3.875%, with the total size of the bond upsized due to strong demand. Investors were particularly attracted by potentially higher coupon payments: the notes included a 50 basis point step-up, paid to investors in the event the company doesn’t achieve its sustainability KPIs, in contrast to the IG market where a 25 basis point step-up is more common.

ESG disclosure obligations are ramping up

The new Sustainable Finance Disclosure Regulation (SFDR) brought in its first wave of disclosure obligations from 10 March 2021, with the aim to provide more transparency on sustainability within financial markets in a standardised way. The disclosure rules are primarily aimed at institutional investors & portfolio managers, but it will undoubtedly impact corporate treasuries – which will have to evidence key ESG risks & impacts for investors – and is driving more client conversations as a result.

Libor reform remains a top focus for clients

Companies continued to opt into the International Swaps and Derivatives Association (ISDA) fallback protocol but are mindful of the mismatch between ISDA and Loan Market Association methodologies. Issuers are generally not including risk-free rate (RFR) language in their euro medium-term note (EMTN) bond documentation, but they are proactively addressing loan docs and amending existing Sterling-denominated floating-rate notes (FRN) as the Libor endgame nears.

Chart of the week

Bond rates have shifted higher on a fiscally driven recovery and expectations of higher inflation. But there are signs markets have found a level they are comfortable with for now. The ECB’s decision to lean into the sell-off may have helped in Europe. But it is a high-risks week – markets may yet be upset by the way the Fed and BoE describe their view of the move.

10-year benchmark bond yields (%) for US, UK and German government

Sources: Bloomberg, NatWest Markets

Regular updates & tools to help you get ahead

Regular updates on market moving themes & tools to help your business thrive

For the full weekly newsletter login to Agile Markets. Don’t have access? Contact us here.

Corporate treasury
Bonds
Credit
FX
Rates


This document has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this document has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this document, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this document. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this document and any issues that are of concern to you.

This document does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright 2021 © NatWest Markets Plc. All rights reserved.