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Will September See The Primary Market On Fire?

2 September 2016 by Chris Bowie

Given today is the 350th anniversary of the Great Fire of London, and that in little over a month we are moving offices to be right next to The Monument to that historic fire, it is incumbent on me to get as many incendiary references as possible into today’s blog.  But please note we are implementing a strict no smoking policy at the new offices as we don’t want The Monument to commemorate two great fires of London.

Since Mark Carney announced that he was going to rekindle the UK’s corporate bond purchase programme, the sterling credit market has been set alight in terms of spread and yield contractions.  The average UK BBB credit has tightened by 70bp from the wides in the immediate aftermath of the EU referendum, and in yield terms the move is even more explosive, with yields having fallen by 100bp (spread and yield data from Barclays GBP credit index).

Given the Bank Of England has not actually commenced credit purchases yet, the spontaneous combustion of the sterling market has been in anticipation of this large buyer who will be less price sensitive than other market players.  So far, however, the impact on the primary market has not set the heather on fire.  During August, we did see a few new issues come to the market, such as Vodafone with two issues for example, but overall sterling issuance was more of a damp squib than a gunpowder plot.

In contrast to August, this month we think there are much better prospects of a critical mass of new issuance keeping the fires burning.  The end of the summer holidays will see corporate treasurers and investors alike formulate their plans into the end of the year, and for any company that could use funding, the overall level of low credit yields and the strong technical demand from the Q.E. programme, with investors following suit, should allow market taps to happen at fantastic levels.

But before we get carried away fighting fire with fire, we should always remember not to play with matches in case we get burnt.  A strong ramp up in issuance will be good for the sterling market, but our local market has repeatedly shown in previous years that too much issuance at ever tighter spreads can often alienate buyers to the point that deals start struggling in the secondary market.  In fact we saw a little of that last month with the second Vodafone deal which saw modest spread widening immediately after issue.

Given the strong UK manufacturing PMI’s yesterday, and with retail sales in the UK also holding up well so far, we are not expecting any imminent meltdown in the market as the UK real economy appears to be keeping calm and carrying on.  But this does not mean that good fundamentals and extremely strong technicals should be an invitation to burn as much out of the market as is possible.

So our plea to corporate treasurers and syndicate desks is to keep something on the table for both investors and issuers, despite the hugely strong technicals.  Giving a bit of new issue premium will keep the market functioning well, with deals remaining well bid in the secondary market, rather than having them skip out of the frying pan and into the fire.

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