After such a strong performance, do bond markets still have value? Join our expert Catherine Reichlin as she delves into the new issue market and what it can tell us to answer this question.
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Bond markets ended 2023 on a high note, with record performances. The corporate debt market, for example, returned :
- almost 6% percent in November and
- over 4.3% percent in December.
Whether in the US, Europe or even Switzerland, in dollars, euros or Swiss francs, the end-of-year performances were extraordinary.
So what should we do now?
Are the bond markets still attractive?
The buoyant activity on the new issues market points with no doubt in the direction of a big yes!
Once again, all market segments are benefiting:
- The European sovereign market already broke its issuance record on January 12, when it exceeded 100 billion euros in new debt.
- It’s true that Mexico had already set the tone and revealed the market's appetite on January 2nd with a record issue of $7.5 billion
European issuers have nothing to envy:
By January 12, the order books had already registered over 1,000 billion euros in subscriptions.
The amounts issued were just as stratospheric, with 225 billion euros issued before the halfway point of the month had been reached.
The average coverage ratio of more than 4 times varies according to market and issuer. Vonovia, for example, issued its first bond in sterling: it attracted 3.25 billion sterlings for a 400 million bond.
But what indications do these order books give us about investors' intentions?
Long maturities are more attractive to them, which highlights their gamble:
- rate cuts are expected and
- they want to capture high yields for a long period.
Or they want to benefit from an appreciation in the price of their bonds.
And even if that comes later than expected, the "carry", in other words receiving the coupon, is very attractive.
If investor interest is easy to explain, what is it that drives issuers to commit to high coupons for the long term?
In a market where reputation is key, thin order books send out very bad signals. And issuers are not borrowing at any price either.
Risk premiums have fallen sharply, and what costs issuers more on the 'interest rate' side is offset by the 'risk premium' side. The risk premium of the US Bloomberg Corporate index has fallen below 1% for the first time since September 21, ……… and stood at 1.60% in March 2023.
To put this figure into perspective, and in a constant environment, this is equals to 30 million less interest expense on a 500 million 10-year bond issued in January compared with last March.
So investors and issuers have found common ground.
The trend is far from abating, and having risen from the ashes after a decade of anemic interest rates, the bond markets still have a long way to go.
