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European bond Research – April 1, 2019

Posted on April 1, 2019
DEUTSCHE BANK TURNS BEARISH ON THE STERLING AS BREXIT CHAOS DEEPENS.  The bank has raised its estimate for the chances of a no-deal Brexit to 25 percent from 20 percent.  Brexit uncertainty has cost the European Union 600 million pounds per week since the 2016 referendum.  It has cost the world’s fifth largest economy nearly 2.5 percent of GDP, inducing larger economic output losses compared to other countries.  Eurozone inflation declined, adding to the pressure on the ECB as it battles economic slowdown.  Although—wages are rising and employment is at a record high, consumer prices have repeatedly disappointed. “It is likely to remain well below the ECB’s inflation target of close to 2 percent over the rest of the year.” The UK 10-year Gilt increased four basis points. FTSE 100, +0.54%, STOXX Europe 600 +1.23%, CAC 40 +1.06%, German DAX +1.37%.

GERMAN ECONOMY WILL GROW BY 0.7 PERCENT THIS YEAR IF BREXIT IS DISORDERLY, lower than forecasted growth of 1.2 percent.  “The British economy faces a severe recession,” stated by BDI President Dieter Kempf.  Airline company, EasyJet clouded by Brexit and economic weakness mentioned demand is drying up as the shares sank 7.4 percent.   Among European investment-yield bonds showing a concurrence of top price gains at appreciable volumes traded, Rio Tinto Finance PLC (USD) 4.125% 8/21/2042 made some analysts’ ‘Conviction Buy’ lists. (See the chart for  Rio Tinto Finance PLC bonds below). Niral Mehta (nmehta@advantagedata.com).

Sovereign-Debt Snapshot

Country Maturity (Y) Yield (%) Previous (%) Spread (bp)
Australia 10 1.790 1.738 -62.6
Belgium 10 0.414 0.406 -200.2
France 10 0.324 0.316 -209.2
Germany 10 -0.069 -0.067 -248.4
Italy 10 2.481 2.479 6.5
Japan 10 -0.091 -0.093 -250.6
Netherlands 10 0.031 0.032 -238.5
Portugal 10 1.248 1.269 -116.8
Spain 10 1.098 1.088 -131.8
Sweden 10 0.173 0.154 -224.2
U.K. 10 0.997 1.000 -141.9
U.S. 10 2.416 2.393

Credit-Default Swap Market

LATEST NEWS: Top moves, sovereign tighteners (5Y): Belgium 25 bp and China 44 bp. Sovereign wideners (5Y):  France 29 bp and Dubai 137 bp.

New Issuance

New Issues New Issues [Continued]
1. NRW Bank (EUR) 0.175% 4/15/2026 (04/01/2019): 100MM Senior Unsecured Notes, Price at Issuance 100, Yielding .18%.

ADI Indexes

DATA CHECK:

iShares Core EUR UCITS iShares Euro High Yield UCITS
NAV as of 04/01/2019, 131.18 NAV as of 04/01/2019, 103.49
Daily NAV Change (%) +0.02% Daily NAV Change (%) +0.19%

OVERALL EUROPEAN CREDIT MARKET:
The euro-zone economy shows signs of positive momentum, although conditions are expected to deteriorate hindered by the termination of quantitative easing, weakening credit rating quality, and uncertainty regarding the outcome of Brexit. Closely watched indicators and rates:

  • Eurostat’s unemployment ratecurrently 7.8% (seasonally adjusted, January 2019)
  • Eurostat’s quarterly GDP: 0.2% (2018 Q3 Final)
  • 6-month Euribor: current value –0.228%, as of 03/29/2019

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