The first analysis of herd behaviour in humans is usually credited to Dr Wilfred Trotter’s 1914 book, Instincts of the Herd in Peace and War. This week it was firmly on display in the covered bonds market, where issuers seem to have collectively realised that they should not take anything for granted.
As many as seven euro covered bond benchmarks have surfaced in the last week —more than was seen in the whole of either February or March. And, for the first time this year, there is a decent pipeline of deals from the core and periphery, as well as from other parts of the world.
But, as much as this development is welcome, the sudden rush of deals shows a distinct lack of foresight on the part of issuers. After weeks and weeks of waiting — in spite of conditions that were nothing short of stellar and when funding was exceptionally cheap — many had still been unwilling to take the leap and come to market.
And it was not for lack of demand. Yield-starved investors have been barely able to discern between the weakest periphery names and the strongest issuers in Europe’s core — but very few names took advantage of this extraordinary situation.
At best, most issuers have probably saved themselves no more than a couple of basis points by choosing to wait. At worst, with volatility rising by the day and deals now jostling for attention, they might have damaged their chances. No wonder it suddenly looks as if there is an unseemly rush to get in ahead of the summer holiday season.
The crowded feeling is partly just that — a feeling. After a year that has been so quiet in the covered bond world, it doesn’t take many deals for the market to seem busy.
But there is also unquestionably the feeling among issuers and investors that the tide has turned. A few weeks ago German 10 year yields were at 1.2%. Now they’re at 1.5%, and it doesn’t seem too much of a stretch to think they could soon test 1.7% — a level not seen for more than a year.
At last it seems that issuers finally believe what their DCM advisers have probably been telling them all year — that there’s nothing to be gained from not pressing the button.
This Friday’s US non-farm payrolls report will be crucial. Much higher than the 165,000 increase that is expected, and fears of tapering will become all the more intense.
The bond market has yet to see a real rout. If it comes, issuers that have come to market — and the investors that supported them — will be licking their wounds. But those that did not may be shut out altogether.