Goldilocks and the no bears

Just how tight can the market get?

Following some nasty surprises in 2016, markets were at the start of the year nervous about political and geopolitical events bringing an end to the rally in credit markets by causing collateral economic damage. But as 2017 has developed, potential crises have either been averted or proved to be less harmful than expected.

Most recently, Spain’s banks showed that even a relatively unanticipated development such as the tensions around Catalan independence could be overridden. Even the sum of all fears, nuclear tensions in the Korean peninsula, today leave markets unruffled — indeed, the Vix “fear index” is at historic lows.

Have mainstream markets taken leave of their senses?

Underlying the rally in credit and other markets is what economists have increasingly been perceiving as a Goldilocks scenario, with growth more assured than had been considered likely at the start of the year, and central banks showing greater patience and largesse than had been guaranteed, against a backdrop of a benign inflationary outlook.

The subordinated debt markets have not only benefited from this optimistic scenario; they have contributed to it, by enabling the new regulatory framework aimed at creating a safer system to come into being. Witness, for example, the expansion of the senior non-preferred asset class this year beyond France into Spain and Belgium. And the anticipated growth of the asset class in countries such as the Netherlands and Italy equally promises gains on both sides.

It is therefore no surprise that — despite some brief wobbles — the strength of demand has enabled new tights to be set across currencies and asset classes, most notably Nordea setting a coupon low of 3.5% on a EUR750m AT1 benchmark.

So while prices may oblige one to ask whether this is irrational exuberance, it’s hard to find a reason to act otherwise.

Neil Day, Managing Editor