The spell of market volatility that followed comments from Federal Reserve chairman Ben Bernanke that QE may not, in fact, last forever, finally seems to made investors realise that spreads are too tight after all.
The result was that a Belgian dollar trade on Monday that could have been something of a star turn until recently, turned out to be a deal that even one of its lead managers found hard to be enthusiastic about when talking to EuroWeek.
The deal came flat to Cades. That would be fine in euros but Belgium’s rarity in dollars means its relative lack of liquidity should have equated to a bigger premium for buyers. That it was the amount of that premium that concerned investors rather than the opportunity to buy a rare sovereign name in the currency was one factor involved in this deal’s slow progress.
On Tuesday the EIB was in the market with a 10 year EARN — the sort of deal that will be a bellwether for SSA new issues, and one that issuer and syndicate cannot not afford to get wrong.
Fortunately, with a book of €4bn at the time of writing, it doesn’t look as if anything will go wrong. But some of the details of the process illustrate just how cautious the leads are being.
The deal’s co-leads, for example, are not being given any retention bonds, meaning that the lead managers can keep the tightest possible grip on trading. There is also a chunky premium involved — somewhere between 5bp and 7bp depending on whom you ask.
What all this tells us is that the spread compression that has taken place since September 2012 is over — at least for now. Bond investors are adjusting to life without QE and realising that, amid the volatility that has shaken markets in the last two weeks, they need more than a better-than-evens chance of capital preservation from their bonds if they are to commit money.
SSA borrowers have once again done well to take advantage of investors’ desperation for high quality assets to get ahead of their funding schedules for the year. All other things being equal, we may not be in for the sort of spread widening that has crippled the market in recent years. But if we are, as some believe, in a bubble, then at least it is inflating more slowly than it was.
