International SF Weekly: Of UK NC RMBS roll rates and Australian auto ABS

Research evidence excerpt

International SF Weekly: Of UK NC RMBS roll rates and Australian auto ABS

Commentary

Reading the tea leaves of corporate credit

The rally driven by the still incomplete peace deal in the Middle East is on and likely to

continue. The markets seem to have become inoculated against tail risk and seem to

view most if not all negative market developments as a buying opportunity. The market

recovery after an event appears to be getting shorter with time to bounce back dropping

from several months to several weeks if one is to compare the aftermath of “Liberation

Day” and of the Iran war.

That is corroborated by BofA's recent credit investor survey (see linked report), which

suggests that investors’ concerns with high energy prices and private credit risks have

given way to concerns about ‘AI bubble’ but with a low conviction level. The combination

of peace, and the sell-off in oil, has caused "no landing" investor views on the global

economy to surge to the highest ever (47%). Moderate GDP growth, recently upsized

somewhat by our macro economists, chimes with the no-landing view.

Investors are voting with their allocations. Our credit strategists noted in their weekly

review of fund flows that inflows into both high-grade and high-yield funds accelerated

notably. They observe that these inflows have been primarily concentrated in the front

end and the belly of the credit curve. However, short-term funds recorded their largest

weekly inflow in 20 weeks. They expect demand for quality yield to remain strong

through July and August. Last week, short- and mid-term funds benefited from strong

inflows, while long-term funds recorded their third consecutive outflow; IG ETFs

continued their inflow streak 13 weeks in a row. Among European-domiciled funds,