Good Morning.

Credit markets continue to rally, and how. The rally has remained relentless with the asset class gaining slowly but firmly and spreads are already at the best levels since the second half of 2007. Total returns so far this year have surpassed all expectations. Most of this performance is mainly due to the carry trade but also largely due to the drop in benchmark yields, which seem set to remain low as long as the ECB ponders using unconventional measures to fight against the low levels of inflation. In the event of an uptick in inflation, it would ease the pressure on the ECB to act and we may see bund yields rise gently, testing credit returns. However yields would have to rise sharply to make a significant impact on returns in the long.

Earlier on this week, what can be interpreted as a change of heart by President Putin, who called for the East Ukraine referendum to be postponed coupled with a dovish testimony by US Fed Chair Yellen as well as encouraging trade figures out of China, all contributed to this week’s positive performance in credit. While the short-term implication of Putin’s comments can be short-lived, the same cannot be said Yellen’s testimony which is expected to have longer lasting implications for risk. Likewise, the same can be said for European credit in view of the prospect of yet another round of Quantitative Easing by the ECB in the second half of 2014.

In fact, during yesterday’s much awaited MPC meeting, the dovish ECB rhetoric prevailed once again, adding further impetus to the rally in credit markets, providing further room for additional spread compression in the short term. While no policy measures were announced, President Draghi’s press conference left the door open towards further policy measures, and market analysts expect this could take place as early as June. The ECB’s three key indicators, namely inflation, liquidity, and the exchange rate have sent mixed signals heading into yesterday’s meeting. Consumer Price Inflation increased during April less than forecasted however, with the EURUSD current peg flirting with the 1.40 level just ahead of the ECB conference. All in all, what can be taken fro yesterday’s MPC meeting is that the possible measures by the ECB at the forthcoming June MPC meeting can be broken down into three categories, namely, liquidity measures, rate cuts, and asset purchases.

If last week was a quiet week in the primary bond market, this week surely made amends, with a flurry of bonds being priced and issued. Most notably, as far as for bank debt supply is concerned, two new Additional Tier 1 instruments are being launched this week. Yesterday Santander issued $1.5bn in a 6.375% perpetual note whilst Deutsche Bank announced that early next week it will be launching its inaugural AT1 issues, spread across three ranches in in €, $ and £.

Have a nice day!