As a reminder, the vast majority are Covered Bonds, issued by big banks under their regulated Covered Bond programmes.  They are secured (covered) by a pool of residential mortgage loans, mostly with average LTV’s of sub 50% across the whole mortgage book, which remains on balance sheet. The key characteristic to holders such as Tenax is that we have ‘dual recourse’ not only to the assets of the cover pool but to the issuing bank as well, hence they are so highly regarded from a credit perspective and are rated AAA. Most issues are over £1 billion in size and due to their safety, floating characteristics and sizeable yield pick up over comparable Gilts, they are still much in demand as money market products.

Over the first few weeks of March, the floating rate notes (FRN’s) were one of the few asset classes to be trading in an orderly fashion with decent size going through and, indeed, we sold some to test liquidity and to ensure that Tenax really did have ready cash on hand to embrace opportunities that the volatility might have, and has, presented us. They saw a little selling pressure but it had limited effect on spreads due to their return of capital rather than return on capital characteristics outlined above.

We are conscious that with base rates now as low as possible, that the yield on the FRN’s has reduced. However, we feel that they have done the job intended along the way and the capital that they have preserved is available to pick up higher yielding assets, so we are looking to reduce the allocation as appropriate. I must stress that while we hope ‘the line in the credit sand’ was drawn by central bank action culminating in QE infinity from the Fed (and possibly everyone else), we cannot be certain how events will continue to unfold, so we are not about to make a wholesale shift and will retain a meaningful allocation. We are also mindful that down the road inflation might actually make a reappearance, especially with the anticipated rebound in activity once economies restart, but this is hardly a prime consideration at the moment.

We have used some of the liquidity raised to embrace new corporate issues in the primary market from names such as a Diageo 9-year yielding 3%, Experian 12-year yielding 3.5% and even a VW Financial Services 5-year yielding 4.5%. All are now trading very well in the secondary market with spreads much tighter than where they priced. We have also been very active in the secondary market, picking up ‘beaten up, but quality’, credits from the likes of Credit Suisse, British Telecom and HSBC. We will therefore continue to move assets out of the floating book into higher yielding assets but in a measured, and we hope wise, way.