Europe’s high grade corporate bond market has become something of an anomaly over the last few weeks, acting as the destination for flight to safety investors. Canny issuers should look to exploit this before the dust settles.
High grade bonds are, in theory, already a pretty safe bet. The default rate is low, and except for a few outlying issuers in bruised and batter sectors, investors can expect borrowers to stick to even the unwritten rules of the market, such as calling hybrids on time.
But when it comes to a flight to quality, there are always other sub classes that pip corporate bonds to the post. SSAs is the most obvious, for their liquidity if nothing else, and senior bank debt was a strong flight destination during the coronavirus pandemic. It was corporate issuers that received the brunt of the economic pain of widespread government lockdowns.
Now, it’s high grade corporate bonds’ time to shine. The iTraxx Europe Main is headed back towards where it was before the banking crisis started, closed Monday at 87bp, or 17bp off its March high. Meanwhile, the Senior Financials index has struggled to close the sub 10bp gap it historically trades wide to the Main, and closed on Monday at 103bp.
This has created an opportunity for high grade corporate bond issuers. New issue concessions last week came in 5bp to 10bp lower than where many in the market expected, and all deals have tightened in secondary.
Some have tightened significantly, with the Netherland’s Wolters Kluwer seeing the 9bp concession on its €700m April 2031 bonds vanish in secondary. Last week was also notable for Schneider Electric's two year trade that landed flat to mid-swaps. A remarkable achievement at the best of times, and a week after a major bank collapses in Europe is far from the best of times.
At the risk of sounding like a syndicate banker, issuers need to get a move on. Borrowing conditions are going to worsen before the end of the year, a fate almost guaranteed bythe effect of short term rate rises on corporate bond yields.
But for now, investors are hungry for corporate paper and, crucially, are still feeling queasy about FIG debt. Corporate bond issuers should exploit this uneven demand, it won’t last.