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After last week's rush of emerging markets and bank capital
deals, supply has eased. This week's highlights include the
Netherlands' announcement of imminent plans for a debut Green Bond,
and the return of Germany's reference 10-year Bund to negative
yields. Sharjah's USD1 billion sukuk and USD700 million for
Russia's Evraz were the largest emerging market deals. Also, of
note was an AT1 deal for Bank of Georgia, the region's first.
Announcements on funds flows continue to indicate support for the
bond market, while looking less positive for equities.
Negative Yielding Debt
Germany's 10-year Bund has fallen to negative yields for the
first time since 2016, closing on 22 March at -0.02%. It started
2019 at 0.24%, and its 2018 peak in May was at 0.65%. It now stands
at -0.04%. The Financial Times cited Bloomberg data on 26 March
2019 noting that over USD10 trillion of outstanding government debt
is once again trading at negative yields. In early 2018, this had
reached a low of USD5.7 trillion, having last been at its current
levels in September 2017.
New Issuance
This week's largest Emerging Market bond issue was a USD1
billion sukuk for the Government of Sharjah. The seven-year deal
was priced at 155 basis points over mid-swaps versus guidance of
180 basis points, with demand reaching USD4.3 billion.
Additionally, Russian natural resources and steel company Evraz
sold USD700 million of five-year debt at 5.25% in conjunction with
a tender to repurchase its 6.5% April 2020 issue: of the USD700
million outstanding, USD580.5 million were tendered. Additionally,
Indian National Railway Corporation, the state-owned finance arm of
Indian Railways, sold USD500 million of five-year bonds at 3.73%.
It was followed by power company NTPC, which arranged a deal with
the same parameters at 3.75%.
Also, from India, Reliance Industries is set to become the first
Indian borrower to tap the German private placement or schuldschein
market. It is reportedly raising USD170 million equivalent from the
transaction.
Bank of Georgia, the country's largest bank by assets undertook
an AT1 deal, described in the bank's statement as the first AT1
issuance from Georgia and the South Caucasus region. It sold a
quasi-private placement of USD100 million of perpetual debt priced
at 11.125% versus price guidance of a low to mid-11% coupon until
first call after 5.25 years. The deal follows the recent
introduction of Basel III regulations in Georgia. Archil
Gachechiladze, Bank of Georgia CEO noted that the deal permitted
the bank to diversify its capital structure while providing "a
natural hedge against dollarization in the economy".
Other
In a statement on 22 March, the Dutch State Treasury Agency
(DSTA) announced that it will seek EUR4-6 billion from a Green Bond
sale with a term of 15 years or longer. The Agency will announce
full details on 8 April.
According to Bank of America Merrill Lynch data, USD20.7 billion
was withdrawn from equity funds in the week to 20 March. Of this,
USD13.7 billion was from US equities, and USD4 billion from
European stock funds. This reversed a USD14 billion inflow to
equities BAML had recorded the prior week. For the year to date,
its data shows an aggregate outflow from equities of USD66.8
billion. By contrast, USD12.1 billion went into bond funds, the
largest weekly inflow since January 2018.
Our Take
After last week's exceptionally active supply, it's perhaps
unsurprising that this week has been quieter. In recent weeks we
have expressed repeated concern over the apparent conundrum of the
strength in equity markets against the background of forecasts of
slower growth in the USA and EU, and limited inflows to equity
funds. The latest data continues to indicate that debt markets
enjoy far stronger underpinning at present.
Outstanding levels of negative-yielding bonds have moved back to
2017 levels. Much of the negative yield bond stock is European,
reflecting the negative levels of the ECB's policy rates, but the
current configuration is now being maintained without the benefit
of ongoing monthly support to the market from the ECB's Asset
Purchase Program. As such, it is a strong indicator that the
markets now expect European policy rates to remain negative for
some time to come, and that "rate normalization" will be an
extended process.
The planned Green Bond debut by the Netherlands follows
precedents set by other sovereign borrowers such as Belgium and
Ireland in the recent past. Given the growing number of funds which
specify "ethical" objectives for investment, such financing should
offer at least marginal benefits in terms of the range of
distribution, even if actual price savings appear limited at
present. Further such precedents are likely.
Posted 29 March 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit