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Corporate Bonds

UK corporates and banks on an election high but issuance will be slim

The Conservative Party’s strong win in Thursday’s general election is thrilling the UK’s financial sector and business world on Friday. Shares in UK banks and house builders — the very domestic sectors seen as most at risk of a hard Brexit or weak UK economy — have soared by 10% and more, while bond yields, especially for banks, have tightened sharply.

The election result, which will give Boris Johnson a majority of 42 seats in the House of Commons, fires two jet pack engines for UK PLC — it takes away the risk of Britain leaving the UK without a withdrawal agreement, and annihilates Jeremy Corbyn’s socialist Labour Party as an electoral force, probably for most of the next five years.

“Everyone was extremely worried in finance,” said a syndicate banker in London. The chance of Corbyn forming the next government was “an Armaggedon scenario. You would have been looking at RBS shares down 10% today, not up 10%”.

This good news for investors has given a further push to risk markets that were already rallying strongly on Thursday night’s news that President Trump had struck a preliminary trade deal with China, which means cancelling an imminent load of sanctions on $156bn of Chinese imports and halving existing tariffs on $360bn of goods.

Even in UK assets, about a quarter of the rally was attributable to Trump, the banker thought.

Banks tighten smartly

In the bond market, bank paper has moved most sharply.

“Everything is in the frying pan at once — it’s a bit of an indiscriminate rally,” said the head of EMEA syndicate at an investment bank in London. “Within the context of everything rallying, the UK is by far the outperformer. Challenger banks are 10bp to 15bp tighter. UK AT1 is 1 to 2 points up, UK financial seniors are as much as 10bp tighter in euros, in sterling as much as 15bp, and smaller subordinated insurance paper around 10bp tighter.”

The 10 year UK Gilt yield rose from 0.8% at Thursday’s close to about 0.88% during the night, but has fallen back to around 0.85%.

“People have been in early to trade but on the corporates side we’ve seen less flow for sure,” the head of syndicate said. “Banks probably have much more to play for when it comes to what happens next on Brexit, and the whole Tory victory. When it came to whether Labour was actually going to be able to enact nationalisation, people had been buying utilities previous to the election.”

Trading volume in corporate bonds is muted, because it is a Friday in December, said Philippe Bradshaw, head of European syndicate at NatWest Markets in Amsterdam. UK corporate names were 4bp to 8bp tighter in euros, he said, while non-UK companies had tightened by 1bp to 4bp.

“The smart money was already overweight UK names, so it was not like people have been scrambling to cover shorts,” Bradshaw said.

Issuance window open but will anyone use it?

The Conservative win raises the possibility that there could be bond issuance before Christmas, especially from UK issuers.

“There are a few issuers interested in the rally, but I would argue: why don’t you let it play out?” said the syndicate head. “In theory, it opens the market for UK issuance next week, whether banks or corporates, but I’ll be amazed if we get even one deal in total. People have done what they needed to do. If they come out now, investors will be like ‘OK, but you didn’t have to.’ If you’re sensible you should ride it out till January.”

A rival head of syndicate was more optimistic. “Ordinarily this would be quite a good time for the sterling markets, given the redemption profile in early December,” he said. “But the election has put a dampener on things. However, I wouldn't be surprised if we see a few things next week, by those who have trades 'oven-ready'.”

He thought financial institutions, especially in sterling, could be especially interesting for potential issuance next week. “They've got blackouts in January so we might just see some cheeky deals in the week before Christmas.”

Cool January

Looking ahead to January, bankers are not expecting a bumper crop of issuance. “While we have every reason to think that things are looking good for January, we can't expect the same rebound as we saw last year, for obvious reasons,” said the head of syndicate.

January 2019 was marked by a strong risk asset rally as investors reversed their bearish positions of the last quarter of 2018.

The banker predicted “a more typical January where the first issuers get the best terms and then spreads will slowly decay, as indigestion takes effect. So we are telling issuers that the window is open for next week, to lock in some good terms. Plus, if you look at the first few days of next year, we have a two day week, then a weekend. So there will be little time to get in and do things.”

A competitor said he thought issuance would get started pretty slowly in January. "The market should remain stable," he said. "This has been a record year [for European corporate issuance], by any metric, so people have done a lot of prefunding. We will definitely see a few trades, but I don't think a deluge. There is probably very little visibility on the January pipeline. Borrowers are very reactive. They want to feel the information. They will see what happens today, and then maybe start to engage and say they are interested in issuing in January. So I wish I could say we had a massive pipeline for January, but not only do we not have one, but I can guarantee that no one else on the Street does. We will only start to pick up some mandates right at the end of the year and in the beginning of January."