The Federal Reserve clearly signalled that a tapering of asset purchases is coming soon and will then look to hike rates.
Some forecasts put their taper plans at $15 billion per month meaning that in 8 months they would have ceased buying bonds and the artificial bid that has supported yields will be gone. Unlike some other central banks they have not stated that they need to wait for this moment to begin hiking rates. So far, markets have taken this change of rhetoric in their stride and for a short while were far more concerned with the deterioration in credit quality at the Chinese monster that is Evergrande. We joined an excellent analyst call and it is pretty clear that their model of using pre-sale proceeds as working capital is unsustainable if there is any slowdown or downturn in property markets, as are their payments on their huge debt pile. Most of this is onshore but their offshore USD lenders will probably suffer the most and the lure of a 10% coupon on their single B rated 2023 bonds might have been powerful in April 2019 but not so now at single C and trading at 25 cents on the dollar.
The just-in-time nature of our UK energy markets was brutally exposed by a spike in LNG prices and led even the Bank to comment that there were inflationary consequences. Their recent meeting was the most hawkish yet and potentially their hiking cycle has moved forward to possibly as soon as November, i.e. ahead of the Fed, UK 2-year paper now yields more than US 2-year notes for the first time since 2015 as the curve begins to normalise somewhat. The inaugural issue of Green Gilts saw no lack of demand as the £10 billion 2023 bonds saw a book of over £100 billion for a greenium of 2bp.
The ECB is the central bank that looks more isolated in its stance but one look at the Bund curve tells the (disastrous) story as it remains negative out to 20 years. Corporates continue to take advantage of this, recently Segro issued ten year risk in EUR at a 0.5% coupon and, apart from a day or so of the primary market pausing to examine the Evergrande situation, all currencies have seen high levels of issuance with more than $125 billion in USD alone so far this month. Throughout all of this spreads have hardly moved and if anything tightened slightly as demand for credit remains unabated.