September new issuance has opened with a bang as we expected. Volumes are high and the issuer types are diverse, with a slant towards more frequent borrowers who tend to have their ducks permanently lined up in order to jump on favourable conditions. We expect this trend to continue throughout September as bankers push borrowers to take advantage of what could be one of the best opportunities they might see this cycle.
So why are conditions so favourable?
In August we saw cycle-beating rallies in nearly all ‘risk-free’ rates markets, sending a total of $17 trillion – around a third of the world’s bond market – into negative yield territory. This rates rally has been aggressively building since last November, when 10-year Treasury yields were at 3.25% (now 1.5%) and 10-year Bunds were at 0.57% (now -0.64%). August was just the crescendo.
Unusually, during this powerful rates rally credit spreads have held in incredibly well, making the overall cost for borrowers as attractive as it has been in a long time. Typically a powerful rates rally would bring soft risk markets, with a widening of credit spreads as risk appetite for credit product wanes. This is clearly not the current scenario; in high yield markets, where the pain is usually the most acute, we have a very strong technical backdrop caused by borrowers redeeming bonds, being acquired by investment grade companies or in some cases being upgraded from high yield to investment grade themselves.
The latter of these is an interesting sub-plot given all the talk of BBB rated borrowers potentially being downgraded to BB territory and flooding high yield markets with new names. The reality, according to Moody’s, is there have been 21 rising stars (upgraded to IG) versus six fallen angels (revised down to sub-IG) in Europe year-to-date, while in the US the statistics show 20 upgrades versus 12 downgrades, and in the UK it is four up to zero down.
With many indicators pointing to a steadily slowing global economy, some regions flirting closely with recession and persistent macro risks in the form of trade wars and a potential hard Brexit, now might well be the last chance for borrowers to take advantage of such good conditions.
Without wishing to undermine the investment bankers, now is probably the easiest opportunity for some time they have had to sell capital market issuance to prospective bond issuers. We could summarise their pitch as follows: historically low government bond yields, attractive credit spreads, a strong technical backdrop, a worsening economic outlook on the horizon, and currently a still willing buyer base.
Supply is expected to be significant this month and, as a consequence, we would say the risk of wider spreads has increased.