Mint – Blain’s Morning Porridge
My traders tell me “absolutely” nothing is going on in the markets..
The new Barclays additional tier 1 $1.5 billion 7.875% issue - is difficult to argue with. Yes… I still hate cocos (contingent convertibles), but they have taken a lift from clearer subordination rules, and despite rumour and sigh at least one of the German ship funding banks will struggle to meet coupons, there’s a willing suspension of disbelief when a strong household banking name is willing to pay nearly 8%! (Icebergs? Not in this weather….) But, UBS at a hundred or so over swaps..? Not so exciting… but it sold.
When I was a lad…the first full week of September was the beginning of the Autumn Funding Feeding Frenzy. The flow of new issues launched from September to December could be extraordinary – deals would trip and tumble over each other. Of course, there were occasional stumbles when a bad deal would stop the market momentarily, or something from the real world would suddenly intrude. It was like a stranger walked into the smoke-filled room full of busty belles and the poker school in the corner– the music stopped, everyone swivelled to stare at the intrusion, and then the party would carry on as before.
Ah.. those were the days. (1985-2007 – the Blain New Issue years.. I’m thinking of releasing a re-mastered edition.. “Great Bond Deals No One Remembers…”).
The competition for mandates was intense – shaving basis points off our fees and spreads. Meanwhile, we’d blithely tell investors “of course, the issuer is bound to make the bond call on the call date...the reputational damage would be too great if they don’t.” (Bond salesman blandishment/fib No 14a).
Issuers would tell us they didn’t really need any more funding – “we’ve already pre-funded next year, so any new deal would have to be very cheap for us to consider it.” And we would pay up to play… making sure we did lots of deals to work our way up the league table.
But I wonder what the point is today? Sure the big borrowers can garner as much cheap money as they wish – some at negative rates. But what to do with it? Invest in negative yield liquidity?
There is certainly capacity for plenty more supply. Central banks from Threadneedle Street to Chuo continue their buying spree, which means buyers are loading up in their wake. Roll on up for the bond party. The modest threat, (even if Federal Reserve Chairwoman Yellen were to go all hawkish tomorrow), of US rate rises is manageable. Cough.. (Bond Salesman blandishment/fib No 1.)
So what could possibly get in the way of 2016 proving a vintage funding season?
By their very definition, you can never predict No-See-Ems. US Presidential candidate Donald Trump is a clear and present threat, as might be the Italy confidence vote.
I talked about Trump yesterday, and got some excellent feedback. Many market sources agree with my gut feel it’s going to be something of a rerun of the Brexit campaign. Fear on fear as the populist plays to the gallery without any real plans, versus a lacklustre campaign from Hilary. It will spike volatility as fears escalate and fester. However, at the end of the day… I’ve got to believe Trump is unlikely to commit economic suicide.. I detect a distinct split among my American friends – some who sincerely believe Trump would be the end of everything, and the more pragmatic ones who expect accommodation. More about this next week – and feedback very welcome.
Meanwhile, after reading a John Mauldin note, and all the joyous cavorting on board Italy’s aircraft carrier earlier this week as Europe’s three wise monkeys planned the future, we do seem to have forgotten there is a big vote of confidence in Prime Minister Renzi’s reform agenda coming up in Italy. Personally, I’m not sure how damaging an Italian government falling can be – it was very common when I was young - but what surprises me repeatedly is how hostile many of the Italians I know are towards the euro. Must think about this a little more..
So.. tomorrow.. it’s all about Janet.. Until then let’s helter skelter in the midsummer swelter…
Out of time..
Head of Capital Markets / Alternative Assets