Corporate Treasury Weekly: the Fed tilts hawkish as H2 funding plans continue taking shape

29 July 2021

Imogen Bachra, CFAEuropean Rates Desk Strategist

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

The Delta variant is weighing on market sentiment but early data out of the UK and Europe is encouraging. With two key central bank meetings down (European Central Bank and the Fed) and one to go (Bank of England), corporate treasurers are focused on revising liquidity and funding strategies ahead of a potentially volatile period.

  • Delta variant weighs on markets but UK and European data is encouraging: Recent data suggests countries that had worryingly high instances of Delta variant cases – the UK and the Netherlands in particular – are seeing those case numbers peaking. Though early, it adds to the positive backdrop, and is important to consider as the economic growth outlook starts to stratify between the jabs and the jab-nots.
  • The Fed lent support to the market’s expectation of tapering to begin sooner rather than later: The monetary authority alluded to making progress in discussions on quantitative easing, which doesn’t signal an imminent taper in our view – but does leave the door open to tapering later this year if the economy performs as expected.
  • We are more optimistic than markets on Delta’s impact on economic growth: Markets continue to price-in concerns over the Delta variant and its impact on growth, but as we’ve discussed before, the vaccine appears to be weakening the link between case numbers and the volume of severe cases. We are optimistic that this will start to creep into the market narrative.
  • And we expect the Bank of England (BoE) will follow the European Central Bank (ECB) and remain dovish: The ECB last week maintained its current (relatively dovish) approach and reaffirmed that it would only start thinking about monetary tightening if it expects inflation to stay above 2% for more than a year. On balance, we think the BoE will also vote in favour of maintaining its current course when it comes to quantitative easing, though it may strike a more hawkish tone if stronger inflation and better-than-expected labour market data allow.
  • We think bond yields should continue to lift higher in the US and Europe: Our year-end targets are slightly lower in the US, but we continue to see higher rates – particularly in the middle of the yield curve. At the same time, we continue to see higher rates in the Euro Area as the market’s growth expectations catch up to ours.

Private vs. public markets in H2: excessive liquidity in the US private placement market is prompting a re-think

As many corporates assess their H2 funding plans, there are some cases where the US Private Placement (PP) market is offering more attractive all-in funding costs compared with the public markets, which is rare given the ‘illiquidity’ premium traditionally charged for US PPs. Attractive pricing is being driven by the excessive cash of US PP investors, limited supply, and strong investor sentiment within the US.

But potential PP issuers are having to balance the more attractive funding levels and the option of delayed drawdown, which may translate into a reduced cost-of-carry, against operating under maintenance covenants (as required in the US PP market).

Liquidity strategies are being re-considered

With the economic recovery cautiously proceeding, many businesses are looking at ways of reducing excess cash held on their balance sheet as a buffer against pandemic-induced volatility, including postponing issuance plans. This article discusses a few helpful options for corporates struggling to find gainful homes for cash in what remains a low-yield environment.

Markets and the general public are right to be concerned about a spike in coronavirus cases, but early data is leaving us more optimistic about vaccine efficacy – and persuading other organisations to follow in our footsteps and update their economic growth forecasts to reflect the divergence between regions with differing vaccination rates.

The International Monetary Fund (IMF) has updated its economic outlook to reflect vaccination divergence

Sources: IMF, Haver, NatWest Markets. EM means emerging markets.

Take a look at our latest quarterly outlook article here, where we dig a bit deeper into this trend.

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