Bond market rally will 'reverse' this year
Investor exuberance in the European corporate bond market, which has propelled record sales and driven risk premiums down this year, will reverse, according to debt capital markets bankers.
Société Générale’s chief European credit strategist, Suki Mann, wrote in a note to clients yesterday that while “we are supposed to be living through the worst crisis of the post war period… someone has forgotten to tell that to the credit markets.”
He said that not only has there been over €170bn ($242bn) of new sales so far this year – the second highest value of sales since the inception of European bond market in 1999 – but the performance of the new bonds issues has been “outstanding”, with the yield-spread of over 150 benchmark sized transactions all having dropped after execution in the secondary market. Benchmark sized transactions are those worth a minimum of €500m.
Such has been the level of investor demand for investment grade corporate credit, yield-spreads on these transactions have been driven down. The spreads would rise if demand was low. However, debt capital markets bankers are warning that demand and the market conditions that have been supportive so far this year will start to crumble.
One senior debt capital markets banker at a US investment bank, said: “This cannot last and we will see a reversal of this run this year, probably in this half.”
Another, senior debt capital markets banker at a European investment bank, said he has urged caution among his sales team. “I have sent a note to our syndicate team saying that its not actually ideal having bonds tighten in 50/60bp in the secondary market within two days of launch, and having order-books for deals up to 9 times subscribed.”
State-controlled Qatar Telecommunications, for example, said today its $1.5bn debut bond sale was more than eight times subscribed, as bids for the bonds exceeded $13bn.
The DCM banker at the European investment bank added: “Because of this issuers are leaving money on the table, and investors are only getting 15% of the allocation they want. So while both sides may appear to be comfortable with that, I’m really not. There are more risks out there now, and we will need to start seeing a move towards better pricing in the market.”
-- Write to Duncan Kerr at dkerr@efinancialnews.com
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