Two months seem to be a very long time in finance and politics. It didn’t take much for the Draghi effect to translate into lower spreads and record bond issuance by European banks and other corporates. Until last August, the likes of Unicredit, Monte Paschi, Banco Popolare, but also Enel and Generali, were having a tough time to issue debt at acceptable cost. Even the Italian government had to pay record yields on short dated paper. However in the last 60 days everything seems to have changed. Paper issued in the summer is now trading ten points above, and all the above issuers have inundated the market with new issuance at continuously tighter spreads. Even the famous Bund/BTP spread has tightened back to 330bps. Retail investors seem they cannot get enough of it.
The market is clearly back to Risk-On, and big time, but the question as always is: will it last? If we take the US version of QE, the answer is that it may last for quite some time, and we are hearing that hedge funds and other pundits who were caught not long enough are continuing to add to positions. However, Europe is different, because unlike the US where there is only one person talking at one time, Europe will continue to be a cacophony of different spins and interests. Currently the odds seem to have turned back in favour of keeping Greece in the Euro and allowing Spain to use the EU facility with minimum stigma…but we wouldn’t bet on a smooth ride.