Western central banks are tightening their belts and ending the era of cheap money, but they are doing so at drastically different paces. That will drive opportunities for funding arbitrage and will create bizarre primary market phenomena ripe for borrowers to exploit.
Jim Bullard, a hawk on the US Federal Reserve’s Federal Open Market Committee, opined this week on the possibility of a 75bp of rate hikes this year, while the Bank of England is well underway with its rate rising programme, having already lifted rates three times in this cycle.
The European Central Bank stands apart. It is sticking to its sequencing plan, meaning that it must end net bond buying before it can raise rates. There is widespread belief that this means the end of net buying for its Asset Purchase Programme in the summer, with the first rate rise coming in September. There is even a growing belief that the ECB will implement another, less formal, bond buying facility to keep eurozone spreads contained in a crisis.
This dislocation in the fight against inflation among central banks will open up a world of funding arbitrage opportunity not seen this decade for the bond market, with the beginnings of this already being felt.
The dollar market for SSAs was on fire this week in terms of issuance volumes, for reasons that bankers found hard to place, but came as 10 year Treasury yields bounced off of three year highs. Meanwhile, financial institutions that pay for their debt in dollars found cheaper funding in euros, sterling and Swiss francs than they could get at home.
Next week, bankers expect euros to be the market pumping out SSA deals again, while dollar volumes whither.
The market should expect to see more of this. An utterance from a policymaker between meetings, or a shock piece of data, now has the power to swing interest rate expectations and yields sharply.
One week euros will be raging, only to dwindle to nothing days later because a policymaker has made a comment, then suddenly sterling will become the best place for those who can print there on the back of inflation data.
Issuers should stay as nimble as possible to take advantage.