History doesn’t repeat itself, but it does rhyme, goes the popular saying. There’s a high chance that top rated European bond markets might be seeing some couplets when the US goes to the polls in the autumn.
French president Emmanuel Macron stunned markets with his decision to call a snap election on June 9 after the far right surged in popularity in the European elections.
The financial institutions market scrapped what was meant to be a busy week and stopped pushing out deals. There was only one senior unsecured deal, for Poland’s PKO BP, last week. This week there had been nothing by the time this article went to press on Tuesday evening.
In supranational, sovereign and agency bonds, France’s SFIL postponed a trade at the end of last week, and the mighty European Union, one of the world’s most powerful and commanding bond issuers, had to accept a smaller, more costly deal than expected when it came last week.
No one told Europe’s high grade corporate bond market to panic. There were more than €10bn-equivalent of deals last week, across a range of issuer types — including borrowers like ITV and Burberry that have not been in the market for years — as well as a barnstorming €3bn trade from Electricité de France.
Close to the bone
Orthodoxy suggests that when trouble hits, the riskier asset classes sell off first and furthest.
Often they do — but not always. There are some disruptions when the fancy asset classes are the price-sensitive ones, and so it has proved this time.
With spreads close to mid-swaps, SSA issuers have no wiggle room when things get wobbly. There just isn’t enough space in the spread to swallow any rates moves on the day. Sometimes it can seem better to give the market a wide berth.
The senior unsecured FIG market offers more spread, and with it a bigger buffer to rates volatility, but issuers in that market find the idea of paying a 10bp or 15bp new issue concession distasteful.
This is particularly true because so many FIG issuers are well ahead in their funding programmes for the year. Why, the thinking goes, should they pay an extra concession for funding that is nice-to-have rather than need-to-have?
Corporate issuers tend not to be as fussy. Historically, a 10bp to 15bp new issue concession is still on the low side. Even going as high as 25bp over fair value will not raise too many eyebrows.
Corporate bankers have warned that borrowers should expect to see this higher level of new issue concession in the coming weeks.
Nevertheless, the market remains well bid, thanks to its Goldilocks positioning: offering spread and protection from default because of the credit ratings — the spread on offer in emerging markets and high yield brings with it a much more real risk of default.
Since before this year began, corporate issuers have known it would be wise to avoid this autumn, when US president Joe Biden and Donald Trump will be going at it hammer and tongs.
The event is tipped by some to be seismic enough to shut entire markets until 2025.
But don't write off the corporate market's inherent resilience and workaday attitude.
The basis point counters in the SSA and FIG markets may be struck dumb, but on the evidence of the past 10 days, Europe’s high grade corporate bond market will — after an initial gasp — be able to roll up its sleeves and price deals.