FYI | Nov 12 2012
By Greg Peel
Danske Bank's base case scenario with respect to the US fiscal cliff is that a resolution will be reached in negotiations by year end. However if this is not the case, Danske sees the potential for a significant widening in credit spreads as the current relatively benign sentiment in financial markets is derailed.
Danske sees this as an asymmetrical risk. Spreads will widen significantly on the “risk off” impact of no resolution but there will not be an equivalent tightening in spreads (risk on) were a resolution to be reached given spreads are already back to levels seen prior to the US debt crisis of last year.
Outside of the fiscal cliff debate there is, nevertheless, the potential for an interesting development. Danske draws on a Financial Times article which suggests global regulators are contemplating allowing A-rated corporate bonds to be included as liquid assets in the calculation of the new liquidity coverage ratio (LCR) which will come into force in 2015. A-rated bonds would be considered Level 2 assets which can comprise up to 40% of total liquid assets.
If the FT article proves accurate and such a move transpires, Danske believes the regulation would be “significantly positive” for high-rated corporate paper as a substantial increase in the investor demand base for such bonds would follow.
Recent years have seen a return to favour of corporate bond issues from Australian listed and unlisted companies as equity markets remain on edge while yield is highly sought after globally. Those companies satisfying the ratings requirement, such as the big banks, can possibly look forward to a jump in demand for such issues.
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