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Capital Markets Weekly: Bond market continues search for yield with new record yield lows

03 July 2019 Brian Lawson

Overview

There are several new indicators of favourable bond market conditions. Of these, two stand out:

  1. European bond markets have reached new record lows. 10-year bond yields for Germany, Spain, Portugal, Italy and Greece have traded down to -0.40%, 0.2%, 0.28% and 2.1% respectively. Italy's 10-year yield has dropped to 1.71%.
  2. Emerging market spreads, as measured by the EMBI+ index, tightened by 9.5% in June to an average spread of 4 percentage points over US Treasuries.

Emerging markets

Saudi Arabia sold eight and 20-year Euro-denominated debt on 2 July. Demand reached EUR14.5 billion, with pricing revised to 80 basis points and 140 basis points from initial guidance of 95 and 155 basis points respectively. Latest reports suggest a deal size of EUR3 billion, with EUR2 billion for the longer-dated tranche.

Despite recent underperformance, Turkey took advantage of recent spread improvement to seek further dollar funding. On 2 July, it launched a five-year dollar benchmark with initial price guidance of 6.65%. It already had raised USD6.4 billion of the USD8 billion it officially has targeted from international markets in 2019.

Pampa Energía became the second Argentine corporate issuer within a week to fund internationally (following YPF). It enjoyed qualified success, pricing a USD300 million 10-year deal at 9.375% versus 9.5% guidance but suggested during marketing that it sought up to USD500 million.

Georgia's TBC Bank last week arranged its first Additional Tier 1 issue, placing USD125 million priced at 10.775% to first call after five years. On 28 June the bank announced that it also has placed USD300 million of senior unsecured debt at 6%, which it claimed was "the lowest ever yield...achieved by a Georgian issuer" internationally. The deal was listed on the Georgian Stock Exchange as well as Euronext Dublin, described by TBC Deputy CEO George Tkhelidze as a "major step forward" for the local capital market, increasing the volume of local publicly-quoted corporate bonds by 88%.

Ukrzaliznytsia (Ukrainian Railways) has sold its first deal in six years. It priced a USD500 million five-year transaction at 8.25% versus initial guidance of 8.75%. Yevhen Krantsov, the company's Chair, flagged that demand reached USD2.5 billion from over 175 investors and that the deal was priced more than 1.5 percentage points below the yield required in 2013.

Costa Rica's national assembly has granted the government approval for a single USD1.5 billion international issue. After extended debate over the growth in the country's debt stock, legislators rejected a government request for a USD6 billion multi-year issuance programme, and a compromise proposal of USD3 billion over two years, with the single issue to be undertaken within a year. The political concern reflects steady growth in Costa Rica's international liabilities, with public-sector liabilities having doubled over the last decade and standing at over 50% of GDP. La Nación newspaper claims that proceeds will be used to repay public-sector debt in local currency, benefitting from the lower rates and longer duration available externally.

Other debt highlights

  • Israel has raised 50-year debt in Euros. On 1 July, it announced that it has raised a EUR500 million 2% 2069 private placement. No further details of pricing or demand were provided.
  • Commerzbank's debut in the Additional Tier 1 market enjoyed an impressive response. The bank's perpetual issue gained USD11 billion demand for a USD1 offering priced at 7% to the first call after six years.
  • US pharmaceutical company's AbbVie's planned acquisition of Allergan is expected to generate a USD38 billion bridge loan facility and subsequent jumbo bond-market refinancing in both dollars and Euros.
  • Bank of Ireland gained EUR3.5 billion of demand for a EUR600 million five-year deal at holding company level.
  • Germany's Merck KGaA sold a three-tranche EUR2 billion package on 1 July: the issue is noteworthy for having its four-year tranche at negative yield.

Equity

Renaissance Capital reported that in the second quarter 62 US IPOs were completed raising USD25 billion, the highest sum achieved in five years. The broker claims that 2019 has the potential to be a "banner" year, with entertainment talent agency Endeavor, managed office company We Work and fitness exercise firm Peloton among those planning flotations.

AB Inbev has announced that the flotation of its Asia-Pacific business will entail the sale of 1.6 billion shares at HKD40-47 each, raising USD8.3-9.8 billion equivalent (pre-greenshoe). This represents the largest IPO so far in 2019.

Our take

This year's IPO activity remains impressively strong overall and should gain further momentum from the sizeable pending deals within the upcoming calendar.

The strong market enthusiasm for debt investment is being supported by underlying cash flow. Two such indicators are:

  1. According to State Street data reported by Bloomberg, inflows into US fixed income exchange traded funds (ETFs) reached a record USD25.4 billion in June 45% above the prior October 2014 record.
  2. According to Reuters calculations using China Central Depository and Clearing Co data, foreign holdings of Chinese government debt rose 2.43% in June, the most rapid increase within 2019, to CNY1.16 trillion (USD168.5 billion), a new record. Holdings of debt issued by policy banks rose 1.32% in the month to CNY425.4 billion, after a 13.8% surge in May. Lastly, new inflows to Chinese equities reached CNY42.6 billion, versus outflows of CNY53.7 billion in May.

Overall, this week's calendar is lighter, reflecting the 4 July holiday, but shows no market saturation, and further signs of strong risk appetite. Turkey's return to market comes after several months of weak performance, so is clearly welcome for the country, as is Argentine corporate supply. Israel's 50-year private placement also is an impressive indicator of positive sentiment, with the deal's private format limiting its liquidity and potentially locking-in its buyers.

Posted 03 July 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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