The Great Reopening Trade
As vaccinations continue in the U.S., there are signs the “reopening trade” is gathering pace. It’s a jagged line as inflation fears periodically ripple through markets, yet a few trends are clear.
Airport municipal bonds have rallied as passenger volumes jump, with average yields approaching pre-COVID-19 levels for most major city hubs. It’s a contrast to early pandemic days, when the ICE BofA US Airport Municipal Securities Index saw its yield rise to over 4% as investors fled. Pent-up demand could further boost these securities, even as a question mark remains over international travel. Transport sector convertible bonds also reflect a brighter outlook, trading very well in their own right, but underperforming their corresponding equity instruments in a reversal from last year.
Meanwhile, consumer credit looks healthy. Credit card balances saw their second largest fall in history during the first quarter, data from the New York Fed's Consumer Credit Panel showed. In residential mortgages, there’s evidence that tighter borrower guidelines implemented due to the pandemic has resulted in lending to borrowers with improved credit quality. Importantly, of the $1.14 trillion in newly originated mortgage debt for the quarter, a record 73% originated from borrowers with credit scores over 760. The rising tide of home prices also seems to have lifted most boats - including those at the bottom end of the market. It’s a contrast to the aftermath of the global financial crisis in terms of consumer credit health.
On the flipside, Commercial Mortgage Backed Security delinquency rates rose in April. Yet strong new issuance volume appears to have been met with adequate investor demand. Investor optimism has been evident in steadily falling yields for lower-rated CMBS backed by hotel and office properties, some of the hardest hit by pandemic lockdowns. As stimulus and COVID-19 debt relief expire, it will be a sector to watch.
History tells us that efficient markets price in information on a forward-looking basis. It begs the question: has the rebound in pandemic posterchild sectors nearly run its course, or are there more gains to be had?
Stay well,
Lynn
CTO/Partner | Hedge Fund Technology Expert Ex Brevan Howard
3 年Model banking crisis 2008 and total loss of liquidity and order before erm getting too excited? Just general risk management advice and obviously you stress tested these major events, such as $ replaced by new semi-crypto-not-shit-Blockchain e-$ and all $ debt paid in useless currency, That sort of stuff. The usual.
Physical trader of Polyethylene and Polypropylene
3 年Thanks Lynn for sharing this article. I would like to believe that reopening trade, which is negatively correlated to crude, is over. However, I am positive on Airport Muni-bonds, especially the shorter duration ones! Secondly, CMBS market is getting really interesting to watch. The expectation in rise in MBS yields may put some lid on real estate price exuberance in few markets.