Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
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 indicators
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.
Debt issuance
Emerging Markets
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.
ESG
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.
Other debt
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.
Our take
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.
Posted 09 April 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit
