Investors and issuers vote with their feet in bond supply deluge

Any market participants hoping for a quiet few days to ease back into “work mode” after the summer break have had to rapidly adjust their expectations. Tuesday wasn’t just a volatile day for markets as US stock indices led a broad market sell-off in response to tepid economic data, it was also one of the busiest days in recent memory for bond issuance with over $40bn of new paper sold in US investment grade alone.

This surge in supply was widely expected following a quiet summer, and while in the short term a very large primary pipeline may cause some indigestion in certain areas, in the medium term we regard this as a positive development for investors.

A very active new issue market is rarely a sign of overall weakness in the macro picture. Investors and issuers will complain that yields are too low and too high respectively, but actions speak louder than words. Companies are finding it relatively attractive to refinance or raise new debt at current levels, while investors fight passionately for a place in order books that are many times oversubscribed. It goes without saying that this dynamic can change very quickly if sentiment sours, but for now new issues are clearing at levels not too far away from fair value in our view. This is probably a reflection of the amount of cash on the sidelines waiting to be invested, which also makes us think any subsequent sell-offs could be met with a wall of money that should limit spread widening.

As an example, in European financials there has been issuance right across the capital structure. The Additional Tier 1 (AT1) market has been busy with deals from ABN Amro, Alpha Bank, Bank of Ireland, BNP Paribas and HSBC already this week. BNP Paribas’ investment grade USD 10-year AT1 was 11 times oversubscribed and priced at 7.375%, while Bank of Ireland’s gathered an order book five times its deal size and printed at 6.375% in euros (around 8% in USD).  Elsewhere, Crédit Agricole brought a GBP five-year Tier 2 at 5.75% (around 6% in USD) and we count 10 senior unsecured deals so far this week as banks re-enter the primary market after a subdued August.

Another obvious illustration can be found in US investment grade. Tuesday’s $40bn-plus total came from 30 deals, and the story was similar to the European market with low new issue premiums and books several times oversubscribed on average. Flows into fixed income continue at a strong pace, which means both exchange-traded funds (ETFs) and active managers have no problem meeting these supply levels even if new issue premiums are not generous.

Looking forward, the pipeline for the rest of the month looks decent across the board, with September potentially being even busier than usual as some companies attempt to complete their issuance needs before US election rhetoric picks up. Like the glut of supply in European ABS we highlighted earlier this week, for active managers this is a good opportunity to do some switches and portfolio rotation as there is plenty of paper being offered in considerable size and with no bid-offer spread. Relative value adjustments could involve adding new names, extending credit spread duration by going into new issues or picking up cheap shorter dated paper that others are dumping in favour of new issues.