Corporate Treasury Weekly: growth optimism & lower rate volatility are credit-positive

31 March 2021

Giles GaleHead of European Rates Strategy

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4 minute read

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

The big picture

With our 2021 economic growth estimates recently revised upward on the back of stronger economic data and yet more vaccination progress, we see greater optimism spreading through markets over the coming quarter. We still see bond yields rising, but with lower volatility – which means the environment for credit should remain very good.

This week in headlines

  • Spring is in the air – and growth optimism is spreading: our recently refreshed economic forecasts (more on this in our Q2 outlook next week!) show growth trending above consensus in most cases – we now expect global gross domestic product (GDP) in 2021 to reach 5%, 5.2%, and 7.7% in the Euro Area, the UK, and the US, respectively, mostly on the back of huge fiscal stimulus, pent-up savings & household demand.
  • Markets are settling back down thanks to higher investor interest and less uncertainty: markets worried about central bank meetings, and the auction performance & supply of US Treasuries through much of March. In the short-term, we expect that rates stability can continue.
  • A more dovish Fed is negative for bond yields: excellent vaccine progress (143 million doses administered to date) and a potentially weighty long-term stimulus programme means that recovery optimism and inflation concerns are likely to continue. The Fed has so far taken a more dovish approach to the recovery, and unless that dovishness includes more bond buying – which we don’t see happening anytime soon – we think rates will tilt higher, with 10-year US Treasuries touching 2% by the end of the year.
  • European bond markets are likely to see lower supply and higher demand – which is positive for issuers: the net supply of bonds is likely to swing by around €50 billion per month (against investors, but positive for issuers) for the quarter with heavier buying from the European Central Bank (ECB) and lighter bond sales from governments and firms.
  • More stability in rates and a strong growth outlook are ideal for credit: a positive view on credit is consistent with our above-consensus expectations for economic growth, but it could be derailed by higher rates. For now, valuations do not now seem so out of sync with fundamentals that a volatile ongoing correction is needed.
  • We remain positive on commodity-linked currencies: we think the Aussie dollar, Canadian dollar, Norwegian krone, Colombian peso and the rouble all have room to strengthen.

Trending treasurer trades & talking points

Corporate hybrid bonds continue to attract significant demand with yields that can’t be found elsewhere

Hybrid bonds like that recently issued by Dutch energy grip operator Stedin have seen strong oversubscription – with investors taking a keen interest in the higher yields on offer.

The first combined use-of-proceeds and sustainability-linked bond in European markets was printed last week

The European sustainable finance market took another step forward over the past week with Austrian utility firm Verbund selling the region’s first combined green & sustainability-linked bond. The €500 million 20-year bond combines the feature of environmentally sustainable use of proceeds (green projects) with a coupon step-up (0.25%) linked to company-wide sustainability goals. For more on sustainability-linked bonds (and how they differ from green or plain bonds), click here.

Chart of the week

Economic sentiment continues to match the improving weather (see below). The increase in March was driven by improving confidence in all sectors (i.e. industry, services, retail trade, construction) and among consumers, and were of a magnitude not seen since last summer’s steep recovery following the first phase of the pandemic.

Economic Sentiment Indicator (ESI) improved sharply in March

Sources: European Commission, NatWest Markets

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