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Capital Markets Weekly: Positive balance to bond indicators for Q1 2021
This week's blog focuses on end-Q1 indicators. A US Treasury bond index returned the worst performance since 1980, but Q1 issuance levels, in aggregate, in ESG format, and in European sovereign debt all recorded record levels, while high yield bonds reached their lowest spreads in 14 years.
First quarter key debt indicators
There are two recently released indicators for Q1 which summarize the mixed performance of bond markets during the period:
Rising bond yields: The Bloomberg Barclays index for US Treasury bonds with maturities of 10 years or longer fell 13.5 percent on a total return basis in Q1, the worst quarterly performance since 1980 (reflecting the reversal in yields during the period). Having started the quarter at 0.93% on 4 January, 10-year Treasury yields recently traded above 1.7.
Strong issuance volumes: A Bloomberg report, using its own data, claimed that European Q1 issuance of syndicated debt in Euros, US dollars, and sterling had reached EUR550 billion (USD645 billion), a record, and 6.5% above 2020 levels.
These trends of falling prices alongside high issuance volumes are further reinforced below:
According to Bond eValue data, 83% of high-grade dollar bonds recorded Q1 price losses, while 61% of high yield bonds fell in price. By contrast, 80% of investment-grade bonds and 54% of junk debt appreciated in price during 2020, with 64% and 71% respectively recording fourth quarter price gains.
From the same source, first quarter global corporate issuance reached USD439 billion, 7 percent higher than the first quarter of 2020. March issuance improved to USD201 billion from USD115.3 billion in February.
According to ING data cited by the Financial Times, Eurozone government debt issuance in the first quarter was EUR373 billion, a 20% increase on the same period in 2020. Within this, syndicated issues in Europe including those by the UK totaled USD150 billion, a record within Refinitiv data.
As a further clearly positive indicator, option-adjusted spreads on high-yield bonds in the Barclays-Bloomberg High Yield index have fallen to around 3 percent, their lowest level in fourteen years, and versus a peak of around 11 percent early in the COVID-19 pandemic.
ESG trends also were clearly positive. According to Refinitiv data published by IFR, both ESG bond and loan volumes achieved records in the first quarter. Bond issuance reached USD270 billion, while loans arranged totaled USD90.03 billion, a total of USD360 billion versus USD108.9 billion in Q1 2020, when ESG bond sales had totaled USD65.57 billion. The prior bond record had been USD180 billion in Q3 2020.
Overall, ESG issuance was 11% of the global bond total versus 9% in the prior quarter, and 3% in Q1 2020 (its 2020 average share was 5%).
European issuers led the expansion, accounting for USD74 billion of the global total of USD125.5 billion for Green Bonds, and USD81.52 billion of the USD91.3 billion of social bonds. US issuers led sales of sustainability bonds (mixing Green and social use of proceeds) with USD16.8 billion of the USD43 billion sold, with European issuers raising USD13.7 billion.
Ooredoo, a Qatari telecommunication firm, raised USD1 billion of 2.625% 10-year debt priced at 98.92%, a 1 percent margin over US Treasury bonds, 30 basis points inside initial guidance. Demand exceeded USD3.2 billion. It last issued in 2016, when its 10-year sale required a 3.75% coupon.
On 6 April, Mexico sold USD2.5 billion of new 4.28% 2041 notes along with USD760 million issued to fund preferred tenders in a concurrent offer to repurchase a series of outstanding notes with maturities spanning from 2023 to 2040, in efforts to simplify its yield curve. The issue was priced at a 4.28% coupon and 99.94% issue price, opening trading at more than a half-percent premium in price.
Romania marketed 12 and 20-year Euro-denominated debt, with price guidance of 225 and 265 basis points over mid-swaps on the two tranches. It placed a total of EUR3.5 billion, pricing the two tranches with 2% and 2.75% coupons respectively, with both tranches set 30 basis points inside guidance. According to Ziarul Financiar, demand reached EUR6 billion and EUR4 billion respectively. The issue is Romania's first this year, with the country projecting a heavy gross borrowing requirement of RON130.8 billion (EUR26 billion or 11.7% of GDP according to the source). Despite its heavy deficits, and multiple sales during 2020, Romania's debt sustainability remains reasonably healthy, but with a worsening trand. Romania Insider reported that its public debt-to-GDP ratio reached 47.7% of GDP by end-2020, versus 35.3% at end-2019.
Singapore's United Overseas Bank sold a USD1.5 billion two-tranche offering of "sustainability" debt, the first from Singapore. The package included a subordinated Tier 2 tranche, the first ESG capital issue involving a South-East Asian borrower, and the first senior/subordinated package globally by a bank issuer according to the bank's statement. Aggregate demand reached a peak of USD3.2 billion, with ESG-focused investors gaining 60% of final allocations. A USD750 million five-year senior tranche was priced at 1.336%, 48 basis points over comparable US treasuries, versus guidance of 75 basis points. The 10.5-year (non-callable 5.5-year) Tier 2 subordinated tranche was priced at 2.086%, a 123-basis point spread versus 150 basis points initial guidance.
A USD700 million two-tranche five and ten-year bond sale by Korea National Oil Corporation has attracted adverse ESG focus. The end-March deal involved multiple lead managers and some 60 investors. The controversy relates to KNOC being involved in oil production from Canada's tar sands, with suggestions that some of the sponsoring banks and investors may thus indirectly be breaching their ESG pledges not to finance environmentally sensitive and carbon-intensive development, and have wasted the opportunity to strengthen ESG pressure by stepping back from the offering.
Republic of Italy announced a new syndicated 50-year (March 2072) BTP and a tap of its 0.25% March 2028 issue.
It gained record demand of over EUR57 billion for the 50-year portion, its first new 50-year bond in almost five years, when marketing this on 7 April, with total demand exceeding EUR120 billion. Over 400 and 230 investors respectively were involved in the two tranches.
Italy placed EUR12 billion in total, of which EUR5 billion was for the 50-year portion.
The 50-year bond priced at 2.179%, with 35.6% allocated to fund managers and 32.1% to insurers and pension funds: banks took 20.2%. 88% was sold outside Italy, led by German/Austrian/Swiss and UK investors with 29.9% and 23.8% respectively.
The seven-year debt cleared at 0.362, with demand led by asset managers (with almost half the deal) and banks, with 36.3%: by geography, UK buyers led the book with 29.9%, with some 26% sold domestically.
Portugal also sold a syndicated benchmark, with its 10-year deal gaining over EUR30 billion of interest. It placed EUR4 billion with a 0.3% coupon, the lowest on record for fixed-rate syndication by Portugal, priced to yield 0.344%. As part of the deal process, Portugal and its sponsors sought to calibrate pricing to levels where the deal would clear successfully but without the inflation of demand and adjustment of pricing commonplace in major sovereign syndicated sales. Final pricing was adjusted only one basis point from its initial level to reflect this objective, with a healthy 245 accounts participating.
This week's focus on indicators confirms our prior suggestions that while bond yields clearly have risen in 2021, one should not overstate the degree of dislocation this has caused. Expanded European, European government and corporate bond sales are all positive indicators, and the 14-year low in junk bond spreads is highly positive, facilitating funding access for more leveraged firms despite increased reference Treasury yields.
Overall, the indicators that show that despite rising yields, markets have remained highly active. IHS Markit economists suggest that the two indicators are inter-linked: record borrowing requirements by governments combined with strong corporate funding needs have helped to drive yields higher, but with high central-bank driven liquidity helping to avoid substantial market dislocation.
ESG debt issuance growth is unsurprising, both because of the growing political focus on social as well as environmental spending (heavily influenced by the impacts of the COVID-19 pandemic) and the regular presence of large-scale program issuance by the European Union on an unprecedented scale.
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