European Bond Research – March 25, 2019

EUROPEAN OFFICIALS STATED A NO-DEAL BREXIT IS LIKELY. “We don’t want a no-deal Brexit, we’d much rather have the Withdrawal Agreement, but if it is a no deal, let’s do it quickly to avoid larger collateral damage,” mentioned a European official. Exposed countries such as Ireland and Belgium are far from prepared for a no-deal Brexit.  The no deal-contingency measures include: EU financial aid program in Northern Ireland, ensuring basic air transportation is not affected and allowing a temporary measure to create a smooth transition in the central clearing of derivatives and depositories.  EU will honor the entitlement to social security benefits accrued by EU citizens. “It would be a material shock for the EU if a no-deal Brexit occurs,” Brian Coulton, Chief Economist at rating agency Fitch Ratings.  The UK 10-year Gilt increased one basis point. FTSE 100, -0.53%, STOXX Europe 600 -0.49%, CAC 40 -0.27%, German DAX -0.22%.

BRITAIN’S FINANCIAL SECTOR HAS GLOOMIEST OUTLOOK SINCE 2008 CRISIS. “Optimism” about the business outlook among Britain’s financial services firms has fallen at its fastest rate since the 2008 crisis.  Employment across financial services fell at the quickest pace in four years, driven mainly by job cuts in the banking sector as lenders slash branch networks and shift jobs overseas trimming costs.
Among European high-grade bonds showing a concurrence of top price gains at appreciable volumes traded, Royal Bank of Scotland Group PLC (USD) 4.8% 4/5/2026 made some analysts’ ‘Conviction Buy’ lists. (See the chart for Royal Bank of Scotland Group PLC bonds below). Niral Mehta (nmehta@advantagedata.com).

Country	Maturity (Y)	Yield (%)	Previous (%)	Spread (bp)
Australia	10	1.844	1.889	-60.9
Belgium	10	0.430	0.471	-202.3
France	10	0.345	0.402	-210.8
Germany	10	-0.011	0.044	-246.4
Italy	10	2.450	2.451	-0.3
Japan	10	-0.073	-0.035	-252.6
Netherlands	10	0.071	0.131	-238.3
Portugal	10	1.260	1.280	-119.4
Spain	10	1.071	1.099	-138.2
Sweden	10	0.212	0.278	-224.2
U.K.	10	1.016	1.067	-143.8
U.S.	10	2.453	2.533	…

LATEST NEWS: Top moves, sovereign tighteners (5Y): Belgium 25 bp and China 48 bp. Sovereign wideners (5Y): Ireland 36 bp and Italy 200 bp.

New Issues	New Issues [Continued]
1. Erste Group Bank AG (EUR) 0.5% 3/26/2026 (03/25/2019): 50MM Senior Unsecured Notes, Price at Issuance 100, Yielding .5%.

DATA CHECK:

iShares Core EUR UCITS	iShares Euro High Yield UCITS
NAV as of 03/25/2019, 130.64	NAV as of 03/25/2019, 102.74
Daily NAV Change (%) -0.14%	Daily NAV Change (%) -0.08%

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 rate: currently 7.8% (seasonally adjusted, January 2019)
• Eurostat’s quarterly GDP: 0.2% (2018 Q3 Final)
• 6-month Euribor: current value –0.228%, as of 03/22/2019