Issuers no longer have the upper hand in the European bank bond market.
Volatility — fuelled by US president Donald Trump’s unpredictable tariff policies and Europe’s sudden new defence spending plans — has been pervasive across equity and interest rate markets in recent weeks.
That volatility has seeped into the European FIG bond markets, where investors have become more discerning.
New issue premiums — the extra spread that investors demand as compensation for buying a company’s new issue rather than its existing bonds — have crept higher, even as inflows into European investment grade credit funds have remained strong.
Higher premiums are not the only things that investors have been demanding.
Risk aversion has also driven buyers to the belly of the curve, specifically around the five to seven year segment, where order books for FIG new issues have generally held firm.
That is not to say that FIG bonds with maturities beyond 10 years cannot be placed: a new sub-set of yield chasing investors are said to have snapped up longer-dated bank bonds with coupons as high as 4%, or even higher.
But for a majority of buyers, the extra yield on offer for lengthening duration risk in bank bonds is no longer enough — if it is yield you want, then why not just buy rates, they say.
Furthermore, not all credit funds have the mandate to go out to 10 years, which has left some watching idle when longer deals have been placed.
The optimal tenor in bank bonds is firmly in the belly; those maturities offer investors defensive positioning combined with attractive carry against sovereign bonds.
At a time when issuers cannot take investors for granted, they would be well advised to go where demand is deepest.