Corporate Treasury Weekly: widening rate differentials creating new hedging, euro debt issuance opportunities

26 March 2021

Giles GaleHead of European Rates Strategy

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The big picture

Risk are still tilted towards higher bond yields in the US & UK, but with the European Central Bank looking to tame rising rates through increased asset purchases we see credit conditions remaining particularly supportive in Europe and new opportunities arising as result of widening interest rate differentials between regions.

This week in headlines

  • Risks still point towards higher US dollar bond yields in the medium-term but stocks and credit remain stable: the Fed most recently emphasized it will only raise interest rates late in an inflation cycle, and markets expect higher inflation following an enormous fiscal boost and good vaccination progress.
  • A tug-of-war between a slowdown in quantitative easing (QE) and the Bank of England’s (BOE) view on economic growth still points towards higher rates in Sterling bond markets – for now: the BOE took a similar view to the Fed last week – that rising rates reflect the economic outlook, signalling its reluctance to step in to tame rising bond yields. In favour of lower rates, however, we expected a slowdown in asset purchases to be announced in March, but that decision was not taken (though it could still come in May – watch this space).
  • Waning confidence in rising inflation & higher growth in Europe continues to set the pace for markets: the European Central Bank (ECB) is trying to restrain higher rates by stepping up QE – last week it bought €7 billion more bonds than the previous week – while rising coronavirus infections, tightening restrictions and vaccine hesitancy is giving markets a bad taste (particularly in the wake of diverging regulatory approaches to, and confusion over, the AstraZeneca vaccine).
  • But we don’t share that scepticism longer term: vaccine hesitancy isn’t the main bottleneck (vaccine deliveries are), and while Europe may be on less convincing track to ending restrictions vs. the UK and US, we still expect reopening along similar timelines – not least in order to protect the tourist season. Meanwhile, higher savings through 2020 is likely to provide a boost to pent-up demand once restrictions ease.
  • Financial conditions remain easy despite higher rates – which is why we’re fairly relaxed about credit & stocks: this is being underpinned by a substantial boost in government spending (not just in the US).


Trending treasurer trades & talking points

Higher rates & volatility is persuading more corporates to focus on pre-hedging future debt & shifting their debt composition towards the Euro

We continue to see corporates focus on the opportunity and risks of higher rates and higher interest rate volatility, as well as the disparity across currencies and tenors. These include multi-national companies looking to swap US dollar for Euro-denominated debt to take advantage of growing interest rate differentials between the two markets, and – for those who see rate rises peaking – swapping from fixed to floating-rate debt to take advantage of recent rises.

UK bond issuers raise money in Europe to capitalise on greater central bank support & rate differentials

UK companies continue to use Eurozone-domiciled entities for bond issuance in the Euro market – partly to benefit from rate differentials as well as demand support from the ECB’s Corporate Sector Purchase Programme (CSPP).


Chart of the week

Consumer confidence and other economic & sentiment indicators continue heading in the right direction in Europe – including in regions where coronavirus cases and vaccine hesitancy are rising (one of the reasons why we don’t share the market’s scepticism about the region’s prospects).

German and Euro Area consumer confidence came out much better than expected

Sources: GfK, Eurostat, NatWest Markets

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