Discover how a shift in investor sentiment, fueled by falling inflation and revised rate expectations, is reshaping the landscape. Let Catherine Reichlin tell you more in her Bond Moment.
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Hello everyone.
The wind of change is now blowing on bond markets, let’s see how.
So we had a brief period of hesitation where the “fair price” for new bonds was difficult to find. It slowed the primary market but that’s no longer the case.
According to a Bank of America Merrill Lynch survey, the prevailing scenario of "higher rates for longer" was short-lived - all it took was :
- a Federal Reserve meeting and
- falling inflation figures in October for markets to change sides.
Surveyed investors no longer see any rate rises and are expecting lower rates in 2024.
As a result, they are shedding cash and overweighting bonds, the most they have held since 2009. This shift is not linked to a change in economic outlook, but to expectations of: Lower inflation and lower interest rates.
Investors are therefore flocking to bonds on a massive scale, favouring long maturities.
The wave is also spreading to Europe and the tightening of concession premiums (the additional price to pay to issue a new bond) speaks volumes about the market's appetite.
Let’s take an example: Veolia Environnement issued a new hybrid bond on November 13. The bond attracted almost 3 billion euros of interest for a 600 million euros issue. This has enabled Veolia to tighten its initial guidance by 50 basis points, from 6.5 to 6 percent. Said differently this means a yearly interest saving of 3 million euros for the company.
The example of the European Union is also telling, despite its intermediate maturity: The new 5-year bond was more than 13 times oversubscribed, and order books even exceeded 100 billion euros during the day.
Switzerland is no exception to this new paradigm. While the market is used to full allocations and stable indications, things are changing: Tighter initial guidance and cut allocations are the new order of the day.
In the US, investors are flocking to 30-year issues. According to IFR calculations, there are fewer new 30-year issues than last year. Understandably, issuers do not wish to commit themselves for such a long period with yields easily exceeding 6%. But those who have dared have been rewarded with a warm welcome.
Duke Energy was one of those who took the plunge, finally issuing a 30-year tranche that was larger than the 10-year maturity, an event that is rare enough to warrant mention.
So even though the risk premiums are not very high and have been revised downwards - from 170 basis points to 142 basis points for the 30-year Duke - the impact of the expectation that yields will fall next year is taking over.
Between November 6 and 15, the risk premium continued to narrow (to 134 basis points) and with yields falling, the price of the bond soared to 103%.
In other words, the "higher for longer" scenario has been blown by the wind and will not have won unanimous support for long. Thank you.
