Since the referendum on June 23, European borrowers (including UK ones) have issued $8.4bn-equivalent in dollars, euros and sterling. Even in normal times this would be a decent number. The same period in 2015 produced $8.7bn, including two big M&A financings.
Other parts of the bond market have performed less impressively. The public sector market has hobbled along, only this week recovering some semblance of poise, with the first benchmark deals since Brexit Day.
Financial institutions have had a shocker — no public deals for a month until yesterday, when Nykredit broke the hiatus with a €500m tier three deal.
So, does the corporate market know something the rest do not? Have corporate bond investors somehow caught a glimpse of the future European Union, where all is calm and golden, where economic growth is robust, 10 year Bund yields are positive and bank and corporate earnings are plentiful?
Unfortunately, the reality is a little more technical than fundamental: investors have little choice but to buy corporate bonds. It is one of the few asset classes that still offer any yield, and it has largely been free of the political and capital worries dogging Europe’s banks in recent weeks.
Meanwhile, with expectations growing that the European Central Bank will have to slash its deposit rate further and extend quantitative easing over the coming months, corporate spreads are only likely to get tighter.
Total’s €2.7bn seven and 12 year deal this week perfectly illustrates the almost uncontrollable appetite for corporate bonds. It pulled in €7.75bn of demand, including from investors that usually buy government bonds. Concerns over the French company’s exposure to oil price that mattered so much earlier this year were cast aside.
Not wanting to miss out on a one-way bet is understandable. But investors would do well to remember what they are buying, as well as why they are buying it. Technicals can unwind very quickly, even if the ECB is behind them. At a time when the EU is under renewed threat, fundamentals are more important than ever. Don’t get blasé about credit risk.