SSAs look past Trump to Italy and next political risks
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SSAs look past Trump to Italy and next political risks

Matteo Renzi PA 230x150 Nov 2016

Donald Trump may have shocked the world with his US presidential election win in the early hours of Wednesday, but the public sector bond market is already nervously eyeing the next chunk of political risk — particularly given the growing trend for polling companies to make spectacularly wrong predictions.

As with the Brexit vote in June, pollsters gave Trump little chance of beating rival Hillary Clinton to the presidency — but win it he did. With the Italian public voting on constitutional reform on December 4 — which, if lost, will result in the prime minister Matteo Renzi standing down — and a French presidential election next year among the political risks ahead, there is concern that issuance windows will be made trickier if polls on voter intention cannot be trusted.

“Trump’s been underestimated all the way,” said a head of SSA syndicate. “The same thing happened in Italy with [former prime minister Silvio] Berlusconi. Characters like this have a certain charisma but people are not willing to be open about supporting them.

“The inaccuracy of polling is a lesson for us all, just as with Brexit. It’s especially a lesson for those spending a lot of money on polls, like Hillary. She should definitely get some of her money back.”

But polling is likely to remain central to issuance planning, with few alternatives available, said an SSA analyst.

“It’s not like polls are a new technology,” he said. “What else are you going to do? Just guess? Or are you going to keep looking at the polls but with less conviction?”

Most market participants were reticent to speculate on what Trump’s policies could mean for SSA markets, particularly as he has not outlined any clear plans.

“We’re having a nightmare debating it internally,” said the analyst. “It all depends on the balance between protectionism and fiscal impetus and where that gets to.

“It’s not like he’s got an agenda on anything that’s easy to follow — it’s not like following a manifesto like you might in the UK.”

The US Treasury yield curve has experienced a bear flattening, he added, with the 10 year at 1.93% by late morning Wednesday, compared to the roughly 1.83% level it held during most of Tuesday.

“If Trump manages to partly reboot the economy with infrastructure spending as the markets seem to expect, it’ll be good for the stock market and bad for the bond market,” said the syndicate head. “That’s driven US 10 year Treasury yields up. But despite having Congress with him, at least on paper, he is likely to have to negotiate for everything he wants to do. In general, I expect less fiscal discipline.”

Most SSAs have all but finished their funding programmes for the year, although some are still planning SRI bonds. Bank Nederlandse Gemeenten last week mandated banks to hold investor calls for a debut sustainability bond in dollars, for instance. But the volatility in dollars is likely to keep issuers away for the moment.

“In dollars, we’ll have to wait and see,” said the syndicate head. “It’s too volatile just now. There are a few trades in the pipe, especially green bonds. There’s still a window to get trades done from next week to the end of November.”

Euros OK

In euros, Bunds rallied early Wednesday morning but quickly settled back to near Tuesday’s closing levels, while periphery yields were slightly elevated.

That was down to central bank policy still being “the biggest driver, not Trump”, said the syndicate head.

A head of funding at a eurozone periphery SSA added: “It’s not a concern for us. We have a buyer in the market taking so many of our bonds in secondary that we’re not worried about placing paper.”

Confirmed euro supply on Wednesday comes from the European Stability Mechanism, which is scheduled to tap up to €1bn of its 0.125% April 2024s via auction. That will complete its funding needs for the year.

SSA bankers expect other issuers to start considering euro deals once the dust settles.

“Bunds went through a swing but are now back to yesterday’s closing levels as if nothing happened — although a lot did, of course,” said an SSA syndicate official. “ESM will probably be OK.

“We’re in discussion with a couple of issuers to see how the market will evolve. It’s not so much that Trump won, but that there’s volatility in the market. You don’t expect investors to jump in when it’s volatile.

“Markets will settle though. Issuers don’t have much to do and investors have cash to put to work. Everyone will have to adjust and it’ll be similar to what happened after Brexit in terms of market dynamics.”

Craig McGlashan, SSA, MTN and CP editor +44 20 7779 7299

Lewis McLellan, MTN and CP reporter +44 20 7779 7350


Top SSA stories this week:

World Bank prints landmark 15 year Kanga benchmark

ESM accepts early repayment from Spain, cuts funding needs

Election result looms but central banks still hold sway over SSAs


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