The Daily Update - UST, Pres elec, Pemex, Qatar

Here at last, US Election Day and the most expensive campaign in history sees Hillary with a small 3.6% lead in the polls, the same margin as the Brexit polls, and we all know what happened there. Having always been taught ‘if you have nothing nice to say, say nothing at all’ we find it incredible that in a nation of over 300 million, the US has ended up with these two presidential candidates... oops nothing to say.

So the schedule is for polling stations in 50 states and six time zones to open around 11am GMT and close around midnight with the first results expected around 1am tomorrow and the earliest a winner will be declared around 4 or 5am. Key swing states Nevada, Arizona, Montana and Utah are expected at 3am but California, the largest Electoral College, will not be announced until around 4am.

Having had a difficult time of late, credit markets are now in risk-on mode following the FBI announcement at the weekend, and Hillary taking the lead in the polls. The S&P 500 closed on a positive yesterday up 2.22%, breaking a nine day losing streak, the longest since November 1980, which has encouraged investors to adopt a more positive outlook than when Trump was ahead.

US Treasuries remain at the top end of recent trading ranges, not helped by the $62bn quarterly refunding over the next three days where we have new three year ($24bn), ten year ($23bln) and long bond ($15bln) benchmarks being auctioned. But credit markets are seeing some good buying into the event, the Middle East high grade market for example has done particularly well so far his week. Our favoured holdings in Qatar sovereign issues have tightened somewhat, with the 2040 sovereign bond trading 5bps tighter since mid-October to +170bps currently. Our RVM calculates fair value at around +65bps for this bond, which offers a return and yield of around 18%, with a potential 20 points in price appreciation.

One of our more volatile issues of late has been the Mexican government owned integrated oil company, Pemex, which as with all things Mexican dives in price when Trump polls well and rallies hard when Clinton is on top. An example would be the 5.5% 2044s; these bonds are currently trading at a price of 88.90 with Clinton ahead, up from 84.9 last week when Trump was leading the polls. This is still mid-range since 21st October when it traded up above 92.00, so this bond currently trades around 4 points off recent highs and 4 points off the lows, and reflects the 50:50 split seen in the presidential polls. At a current spread of +385bps and fair value at 169bps these bonds offer a lot of potential return to compensate for the volatility. Pemex 44’s currently trade 4.5 credit notches cheap and a return plus yield given a move to fair value of 36%, but it is a white knuckle ride.

So within our global portfolios we have a mix of investments, US Treasuries to stabilise the portfolio should credit again widen on a Trump win but we also have the likes of Pemex to balance the portfolios’ risk characteristics should there be a first female president.

Have a good evening, elections permitting.

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