A combination of real money investors' healthy cash balances and the European Central Bank’s Corporate Sector Purchase Programme have underpinned the corporate bond market since June. Market participants have been impressed with the resilience those bids have given to issuance conditions during past periods of volatility in other asset classes this year.
But after five months of CSPP, many see the programme’s grind on spreads bottoming out, most notably among those bonds on the ECB’s list of purchased assets. Investors are increasingly focusing on the market's distortions and questioning how much longer tight spreads and yields can last for.
“It is all very technical and central bank intervention makes different companies look similar on a spread basis,” said one fund manager in London. "When that starts to unwind, it unwinds a lot."
Most believe that CSPP will help support corporate issuance through any volatility the Tuesday's US elections spring on the market but few believe that it can completely shrug off jitters felt in other markets, as it did just a few days after the UK’s vote to leave the European Union on June 23.
“We are short now because we think credit is tight and investment grade credit is super tight,” said another fund manager in London. “We think a lot of people have taken on duration and interest rate risk and haven’t though to hedge those risks.”
In the case of a Donald Trump victory in the US presidential election, issuers still stand to pay elevated concessions when deal flow returns, said one head of corporate DCM in London.
“A cautious new issue market may last a little longer than just one week but once a deal comes and goes okay, issuance will start again,” he added. “New issue premiums will increase and the more opportunistic issuers will postpone until 2017. Those companies that come will pay a higher concession but because rates will probably be lower, coupons will not be materially different to where they were before.”