Bond markets are on a knife-edge. One bad headline and the whole edifice comes crashing down. As one banker told EuroWeek at the end of last week, “the spectre of a major change in Fed policy is lurking in the shadows, just waiting for the next half-decent economic number to rear its ugly head and spark a fresh round of speculative frenzy.”
This chilling message may have been factored into the decision by three top quality core covered bond issuers to launch deals at the same time on Thursday last week. They were quick to spot a faint improvement in market sentiment that followed a downward revision to US growth and simultaneously jumped into the market.
Though each name might, in its own right, have been expected to do well, the combined spurt of activity lacked co-ordination and smacked of desperation.
It is not often that issuers are compelled to price at the wide end of guidance, let alone be forced into a humiliating reduction in targeted deal size. But that is precisely what happened last week when Crédit Mutuel Arkéa launched its €500m 10 year benchmark. Caisse de Refinancement de l'Habitat, meanwhile, issued a tap that was only just slightly oversubscribed — a far cry from its well supported recent issuance.
And though Münchener Hypothekenbank had waited for a long time to hit the desired 2.5% coupon that investors were looking for, it needed lead demand to fill the almost exclusively German book and had to price at the wide end of guidance for its €500m 15 year deal.
CRH and MuHyp are top quality names that often re-open markets. Their inability to issue successful deals may have given the impression that the market was in a more fragile shape than it really was.
But the issuers might have had a better response had they adopted the more market-friendly approach used this week by an unlikely candidate, a second tier bank in Europe’s periphery.
After courting investors with a comprehensive roadshow and quietly biding its time, Italy’s triple-B rated Credito Emiliano entered a clear market with a more digestible seven year tenor at an optically generous, though not giveaway, spread.
With €1.6bn of demand the small Italian issuer attracted almost exactly the same amount of interest as the combined books of CRH’s tap and MuHyp and Crédit Mutuel Arkéa’s benchmarks.
Bernanke’s tapering comments have put buyers back in charge. Issuers had better take note — and learn how to listen. Otherwise they are in danger of creating a crisis out of a drama.