All over the primary bond markets, investors are dropping out of order books when they start to feel the squeeze. They yanked a quarter of the orders for Yorkshire Building Society’s £350m senior non-preferred deal on Tuesday between it fixing the reoffer spread 10bp tighter than guidance and revealing allocations. It is understood that local rival Skipton Building Society endured something similar when it did its own deal the week before.
Austria provided an even more extreme example last month. It amassed €7.5bn of orders for a May 2029 tranche and over €4bn for an October 2053 slice on April 18. It then tightened the spread by 2bp on the 2029s and by 1bp on the longer clip, leaving €6.8bn of orders on the former and about half of the original total on the 2053s.
These deals might seem to offer evidence that issuers are having a bumpier ride in the primary markets than when central banks provided them with that plushest of suspension systems during the era of low, stable interest rates and quantitative easing.
Certainly, it is causing some worry on the sell-side. GlobalCapital held its first editorial webinar last week, answering audience questions. One focussed on what needed to be done to stop the sort of order book volatility that has given YBS, Skipton, Austria and many more such a thrilling ride of late.
In truth, there are two answers to this question. But one of the solutions the market cannot achieve on its own.
That impossible dream is a return to low, stable rates and big central bank bond buying — as golden a time for bond arrangers and issuers as the early 1990s was for glowstick clutching ravers showing up in fields to dance the night away. Both phenomena have disappeared into history.
The other answer is to offer investors greater certainty about what they are buying and at what spread earlier in the syndication process. Fixing deal size and reoffer spread from the outset means the more sensitive orders are never placed to begin with and only the hardcore fans turn up.
But in markets as volatile as these, issuers cannot be sure of where fair value lies and, meanwhile, must fulfil their duty to price as tightly as is practicable. That means reserving the right to make a final iteration to price once orders are in, or printing bigger size at a wider spread.
That means some investors will keep hooking their orders when they think the new issue premium is too small. If it is to be believed that it is only fast money that drops when the price ratchets in, or if the oversubscription is down to lead managers propping up a deal, then it is no loss to the issuer if what remains is genuine, real money investment. In the case of Austria’s 2053 tranche, about half of the drop was accounted for by lead managers shrinking their orders.
As long as enough orders remain to price a deal useful to both the issuer and its investors, then this variability is very much a strength of the market rather than a weakness as it finds its rhythm in the post-QE era.
The cosy certainties of the age of central bank largesse made for a montonous market. They are gone, replaced with something more varied in pitch and tone but altogether more harmonious — a bond market alive and swaying to each pricing beat.