12th May 2016
Mark Holman, CEO of TwentyFour Asset Management, looks at big week for bond market issuance.
This has so far been the most active week of the year for us in terms of dealing with fresh supply into the bond markets. Contrary to many trains of thought, heavy supply does not usually mean heavy markets. Heavy supply comes into windows of buoyant markets as borrowers are able to remove most of the execution risks from their fresh issuance. By way of an example close to home, the gilt market has now seen 10 consecutive days of rising bond prices, which I’m told is a record going back to the late 1980’s.
Back to issuance though, yesterday the European credit markets saw almost €20bn of fresh supply and in the US there was another $11bn to add to what has already been a very busy week. Most of that supply has been in investment grade markets as investors seek to roll out of negative yielding bonds; the universe of which now totals an extraordinary $10 trillion! Of note in yesterday’s supply was a €3bn 50 year bond from the Kingdom of Spain which came at a yield of 3.50%, which we thought was not bad compared to deals issued by France and Austria, and also versus the 30 year Spanish bond yielding 2.90%. This trend in issuing 50 year debt by governments looks set to continue, with Italy perhaps being next. We are certainly not advocating holding these until their maturity, as there are far better ways ( and much less risky!) of deploying our cash, but in the short term the relative value actually looks quite compelling.
Also of note in the recent supply is an overall lack of high yield issuance. However, we did have an interesting deal from the French fashion house SMCP, whose B2 rated new issue came at a yield of 5.875% in Euros (which is roughly 6.65% once hedged back to £). With such low supply of European high yield, the deal was 7 times oversubscribed; naturally it went well.
The outlook for fresh high yield supply is also light, so the technicals in this market remain robust. Optically too European high yield looks cheap relative to investment grade. A cursory look at the indices shows the € IG index now yielding just 1% with HY still at a lofty 4.54%. A multiple of nearly 5x, versus a multiple of around 2x in £ and 2.5x in $.
With the ECB about to embark on its Euro investment grade purchases in June, we wonder how many Euro investment grade investors will be rolling down the credit curve into high yield or down the maturity curve into 50 year debt? Draghi’s portfolio effect is certainly working.