January is over. The first month of the year is clearly regarded by many as the gloomiest; incorporating as it is does the notorious "Blue Monday", deemed to be the year's most miserable day. This year, however, the financial markets once more appear not to have read the script. Far from experiencing further bouts of angst and pessimism, risk assets have had a positively perky start and none more so than credit markets. Eurozone fears appear to have abated, company results have been reasonable, confidence in the US economic recovery has continued to increase and some commentators are even saying that the worst is behind us (gulp!). All good stuff, but we professional pessimists that are bond investors know all too well that (with apologies for resorting to a most seasonally inappropriate proverb) one swallow doesn't make a summer. However, I am delighted to see that the sterling credit market has seen sentiment change sharply so far this year, as investors not only perceive there to be value in, but feel confident enough to purchase corporate bonds at such attractive levels.
As we all know, the latter months of 2011 were not particularly kind to sterling credit investors as the Eurozone debacle hit all issues badly, bank issues in particular, whilst the downturn in the UK economy merely compounded the misery. Not only did yield spreads widen, but the market was dogged once more by its bête-noire, poor liquidity. Investors who held certain bank bonds, particularly those lower down the capital structure and issued by peripheral European banks, simply found themselves unable to sell. Managers of large portfolios with sizeable positions in such stocks had no choice but to grin and bear it. But poor liquidity is a two-edged sword and, what a difference a few weeks makes! January saw these unloved issues turn around completely, helped in no small part by the aforementioned change in sentiment, the major catalyst for which was the European Central Bank's Long Term Refinancing Operation in December. Suddenly those very same bank issues that investors could not sell were now ‘bid only' and, you've guessed it, could not be bought whatsoever. It is almost as if the ‘price' of some of these stocks is now determined by the level at which investors agree not to deal. In spite of, or to some extent because of, this poor liquidity credit spreads have managed to narrow throughout January, much to the benefit of those investors who regard current levels as attractive.
All eyes now focus on February. Here in the UK, we have seen temperatures fall dramatically and weather forecasters predict they will stay there. Credit investors are hoping the market does not follow suit. Last month saw both investor confidence and activity increase, enabling there to be a significant increase in new issues. There are now expectations, albeit cautious ones, that this month will continue in the same vein. If this does prove to be the case, then the good news is that we shall have an extra day to enjoy it this leap year.
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