Focus on corporate bonds – GAM’s fixed income team on bonds, Bunds, and Turkish coffee shops

It was one year ago this week that Citi’s Macro Risk index hit a post-credit crisis peak and almost its highest possible reading, leading France’s then-president Nicolas Sarkozy and Germany’s chancellor Angela Merkel to prepare resolution measures for the Eurozone’s banking sector.

Looking forward, if history now repeats itself – a significant ‘if‘ – then we would be in for a good run on markets, and in particular for French banks, suggests Tim Haywood, head of GAM’s $14bn fixed income fund operations.

The Citi index uses metrics such as credit spreads and FX and equity volatility to measure risk aversion globally. At a reading of zero, investors are at their most relaxed. They cannot be more stressed than at a 100% reading. This week one year ago, the index tipped 99%.

“After the Citi index hit 99 there was the resolution package for French banks [which] rallied 8%, and then there were 12 ‘risk-on’ weeks – the best markets for 20 years – and it seems like now we are almost at that point again,” Haywood says.

Since last year, of course, much has happened in and around France, not least the replacement of Sarkozy as leader by Francois Hollande.

France was also at one stage, in Haywood’s words, “the battleground between the Swiss national bank and macro hedge funds” with the bank buying bonds”.

And the Long Term Refinancing Operation announced by the European Central Bank in Frankfurt early this year “allowed [French banks] to mobilise great collateral that no-one was willing to lend against”, adds Paul McNamara, head of the $7bn emerging markets fixed income operations at GAM.

More recently again, the ECB’s outright monetary transaction (OMT) program has relieved immediate pressure on Europe’s periphery and its semi-core yet more.

The Citi indicator is now at around 19%.

McNamara’s experience of EM crises has been usefully applied to the Eurozone’s, “as in EMs we have been used to waiting to see how big the package from the International Monetary fund would be – for example in the Mexican ‘Tequila Crisis’, and we would wait until the official sector took a country out of the markets, and put it back on its feet.”

Greece leading up to its own sovereign debt crisis could replace many examples of EM crises, he says. “It ticked every box of EM countries going wrong.”


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