The rates market has traditionally been the bastion of stability in bond markets. Its biggest component — sovereign bonds — provide the risk-free rate and bedrock in any given currency. But that notion has been upended this year with new issuance suggesting there is far more stability in supposedly riskier credit markets.
A government would typically be the first issuer to price debt in a given market, out in all weathers, providing a benchmark pricing reference for other credit issuers to follow. This is because of the perceived stability in government bonds, where yields and spreads should not move far from reoffer, all other things being equal.
But as inflation flared up and central banks rushed to contain it with their swiftest ever rate raising cycles, the order of stability in capital markets has changed.
Corporates are pricing bonds through their — and other — sovereigns. Switzerland-based multinational Nestlé, for example, defied the pecking order this month by pricing seven year and 20 year tranches through the French government curve.
While there are only a handful of such highly rated companies capable of repeating the feat, France's LVMH had already been trading through its own sovereign as early as last October.
These are of course big companies with diversified earnings whereas France has been mired in political crisis and a spiralling budget deficit. Also France issues a lot more debt than LVMH or Nestlé.
But what about the covered bond market — a grey zone overlapping rates and credit?
Sure, French covered bonds are now pricing a touch through OATs, something that the Italian and Spanish markets can also lay claim to. But pricing through OATs has become a contested topic among market participants, suggesting that something is amiss.
Covered bonds are most often triple-A rated assets — the sovereign is rated Aa3/AA-/AA- — that are secured against overcollateralised pools of mortgages or public sector loans as well as offering recourse to the issuer.
Yet, French covered bonds meet stronger resistance when it comes to pricing through OATs than lower rated, unsecured corporate paper.
The clue to solving this mystery lies in what is driving rates markets — from government to covered bonds.
Even a small variance in economic data to the consensus — such as the US CPI reading earlier this month — causes conniptions in the rates market nowadays. The mere 0.1 percentage point difference in the US inflation data repriced Treasuries.
Were they mispriced beforehand? Probably not. Rather this phenomenon has become the market's natural reaction to the uncertainties surrounding economic data, predictions about interest rates and government bonds.
Credit spreads, meanwhile, appear to have been far more insulated as it is easier to form an opinion about a given company.
The idea that there are only two certainties in life — death and taxes — has been around since at least the 1700s. Such certainty of government income is one of the reasons why rates products have traditionally been so stable.
Perhaps now investors have a greater confidence in Milky Bars and champagne.