By Gary Kirk
Typically markets go through a lull period at the onset of August. Many European investors take an extended break through the height of summer and many trading desks are chaperoned with junior personnel with restricted limits. As such, volumes are light and corporate new issuance is non-existent. This year however, the approach to summer has been anything but normal.
The long drawn out Greek impasse resulted in the postponement of many new issues in Q2, traditionally an active period for primary activity. In addition, trading desks were clearly being run from a defensive position and hence inventories were generally flat to short.
Now that the immediate threat of a Grexit has been lessened, the markets feel like they are going through a classic squeeze.
The only release from this market imbalance is a buoyant new issue market but with August just over a week away, we need a raft of deals in a very short period to satisfy demand; issuers quite rightly are reluctant to launch deals, with many investors away on vacation and hence there is a very short window of opportunity.
While we have seen a flurry of activity this week since the announcement of the Greek’s acceptance of the creditor terms, it feels like there will be insufficient time for all the new issues to hit the market to satisfy the pent-up demand and a strong technical rally could well dominate over the next 3-4 weeks.
One can imagine that the market will become more balanced in the Autumn as new issuance should pick up again. Investor attention will focus firmly on the Fed and we would also advise caution about announcing the end of the Greek crisis just yet, but for now, exposure to credit spread feels very much the place to be.
Gary Kirk is a partner and portfolio manager at TwentyFour Asset Management
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