How to avoid post-rally regret How to avoid post-rally regret How to avoid post-rally regret

How to avoid post-rally regret

Bonds 5 minutes to read
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  This year has started with a pronounced risk-on rally, but macro data continue to signal a coming slowdown. How should investors reallocate risk?

Nobody who celebrated Valentine’s Day in Europe can truly say that the economic situation looks dire. Shops were packed with crowds of lovers buying roses and chocolate, and restaurant queues snaked out of doorways as pair after pair sought their own version of an unforgettable night out.

Such hopes, of course, can seem slightly foolish once the reheated prix fixe is long gone and the credit card bill lands in the mailbox. Given the downcast nature of the macro data we see coming in, we have to wonder if investors presently piling up risky assets might soon develop some post-celebration regrets of their own.

Though it seemed as if we were at the brink of crisis during the last quarter of 2018 when the equity market sold off by almost 20%, such sentiments quickly vanished with January’s rally. But is the worst truly over? Although equity and corporate bond markets are sending bullish signals, the data say otherwise.

Here’s the problem: sooner or later, the market will fall again, and the impact will be much worse for euro investors used to a low-yield environment that pushed them towards riskier assets. These investors are now sitting atop a pile of risk that they would not have been exposed to under ordinary circumstances. They are not only more exposed to price corrections and defaults, but they also have precious little latitude to enter the investment grade space at a reasonable price level as the early-2019 rally has boosted value and lessened the risk/reward profile for IG assets.

The chart below summarises this point very well. As you can see, Citi’s economic Index surprise for the euro area started to fall last September. The Dax index and 10-year German bund yields followed suit. Since the New Year, however, a strange thing has happened: the Dax has shot higher despite sliding economic expectations and yields. Risky assets and safe havens are rallying in tandem, demonstrating a split in investor sentiment. Apparently, market participants are buffering their portfolios in preparation for an economic slowdown even as they pile into risky assets to boost returns.
Source: Saxo Bank
It seems paradoxical, but the reality is that investors are not yet feeling the impact of the slowdown, particularly in countries like Germany where domestic demand is well-supported by rising wages and household spending. Additionally, central banks are contributing to bullish sentiment as investors believe they will continue to provide support, liquidity and help avoid a sell-off.

Despite all this, we are at the late point of the current economic cycle and there us not much room left to run. The risk of recession means investors do not have many alternatives to turn to when reconsidering their risk allocation.

Because credit valuations continue to be supported by positive risk sentiment, this could a good time to step out of these names and select safer bonds. The hard part will be for investors to find value in safer names, as the rally has kept yields low within the investment grade space. Unless investors are willing to increase their portfolio duration, they are looking at bond returns that are at times below 1%, making the majority of these investments unappealing, and especially so in light of return net taxes.

So what is a late-cycle investor to do?

We don’t believe that all EUR high-yield corporates are bad investments – like any other product, it depends on your point of view. First, investors should consider how long they want to be invested. If an investor is looking to hold until maturity, then opportunities are out there. Looking at the medium term, however,  investors should be aware that HY credit spreads will widen in an economic slowdown, and this might constitute a mark- to-market loss if the investor is looking to sell before maturity. 

Secondly, an economic slowdown leaning towards recession could trigger a series of defaults of the type that many euro area investors are not accustomed to. It is important that investors make sure they are not caught in anything that points to foreclosure; while higher-rated HY corporates may provide that extra yield versus IG corporates while remaining relatively safe, lower-rated junk may soon prove a trap.

The companies we dislike the most at present are the ones vulnerable to trade war headlines, such as the auto sector, as well as those that are exposed to Brexit but lack a ‘no-deal’ plan. We don’t like subordinated bonds and contingent convertible bonds, and we believe that Santander not calling its perpetual coco bond stepping down from a fixed coupon of 6.25% to a variable coupon of 541 basis points over five-year mid-swaps (XS1043535092) sent a clear message that these instruments are way too expensive. 

It also communicated that if the bond steps down to a lower coupon, the bond holder will find themselves trapped in a lower-yielding security as the issuer will take advantage of the situation by keeping the bond running, as they would probably will need to pay more interest to issue new bonds.

So where can investors put their money to work without being excessively exposed to market volatility and the slowdown?

We believe that banks’ senior unsecured bonds look very interesting: they pay an average of 140 bps above the German bund and the sector is better capitalised after post-financial crisis (and 20121 periphery crisis) restructuring.

Bonds of various ratings and maturities can be found in this space, with banks from the periphery appearing to provide a better risk-off reward. In Italy, we are looking at the UniCredit senior unsecured with coupon of 1% January 2023 (XS1754213947) providing approximately 2.57% in yield. If investors are concerned by Italian political volatility, though, they may want to turn to Spain where we find the BBVA senior unsecured with coupon 1.375% and maturity May 2025 (XS1820037270), providing 1.45% in yield. We also see Caixa Bank with coupon 2.375% and maturity February 2024 (XS1936805776) paying a yield of 2%. 

Better-rated banks such as ING can also provide a nice pick-up over the bund with the ING senior unsecured bond with coupon 2.125% and maturity January 2026 providing 130 bps over the German benchmark.


The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.