Charts to watch for: European loan growth, Opec meeting, tightening spreads and dollar swap spreads
The FT's markets team picks some charts to watch including the relationship between US interest rate derivatives and US Treasury yields, oil output in view of the upcoming Opec meeting, and strong European loan growth.
Produced by Alessia Giustiniano. Graphics by Russell Birkett and Ryan Joseph Ramos.
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A key relationship between US interest rate derivatives and US Treasury yields appears to be on the cusp of turning positive after a long period of being stuck in negative territory. The 10-year swap spread, which reflects the difference between swap rates and Treasury yields, has risen back to zero. It has not consistently traded above that since the end of September in 2015.
In theory, a swap rate, reflecting bank credit, should trade higher than the risk-free rate of a Treasury security. Two factors have instead usurped financial markets theory in recent years. The advent of tougher financial regulation has made it more expensive for banks to transact swaps versus Treasuries, particularly for long periods. The 30-year swap spread is quoted at minus 20 basis points and plumbed a nadir of minus 57 basis points a year ago.
Meanwhile, a boon in debt sales by companies in recent years has also prompted hefty swapping activity. This helps compress swap spreads over Treasury yields. Now, as the twin prospects of a lighter regulatory environment for banks and US tax reform threaten the level of corporate debt sales, the swaps market may finally be on the cusp of normalising.
Yields on the riskiest kind of bank debt, designed to take losses when an institution fails, have fallen consistently over the past year and a half. The trend for additional Tier 1 bonds comes as yields on safer, euro-denominated bank bonds, the so-called senior debt, have traded at extremely low levels for more than a year, encouraging investors to seek out higher-yielding products. The continued descent since early 2016 is further evidence of tightening credit spreads across European markets as the European Central Bank continues to provide extraordinary stimulus.
This month, the average yield on high-yield bonds in Europe fell below 2% for the first time. The chart shows a measure that takes the lowest yield an investor can achieve depending on a call. It's known as the yield to worst, and it's taken from a Bank of America Merrill Lynch index that tracks the market in the bonds. The yield on senior bonds also shows the yield to worst.
In October, loans to businesses across the eurozone increased at their fastest rate since the financial crisis, underscoring the recovery in demand across the block as the European Central Bank prepares to scale back its stimulus programme. Growth in loans to households had already hit an eight-year high in August. And the 2.7% annual rate was sustained for a third successive month.
The figures can be a good forward indicator for economic activity. If businesses are borrowing, it tends to mean that they are investing in infrastructure and in staff. Domestic borrowing can also correlate with economic confidence. And the trend is getting noticed. ECB President Mario Draghi highlighted the robust pace of growth at the central bank's most recent monetary policy meeting last month.
The Brent crude oil price has climbed to its highest level in two years, above $63 a barrel, due to the tailwind from the production cut agreed by the cartel and big producers such as Russia 12 months ago. This resultant gain of almost 30% for Brent crude since last November does, however, also reflect expectations that the 1.8 million barrels a day cut will be extended for the rest of 2018. And that is by no means certain. Unlike Saudi Arabia, Russia is less dependent on higher prices than the kingdom and is keen not to concede too much market share to rivals.