Bond markets face end of bull run — except for ABS
Bond issuers and investors around the world began this week to count the cost of the storm of spread widening over the last fortnight, and the question of the hour was whether the market has now passed its long awaited peak.
The loose consensus among bond specialists and credit analysts is that it will be a long time before spreads enter record territory again.
In North America, a week-long, market-wide sell-off, exacerbated by continued bad news from the auto sector and by comments from the Federal Reserve about rising inflation, left the JP Morgan high grade corporate bond index about 6bp-8bp wider than when it hit record tight levels on March 9.
The US new issue market, which had ploughed ahead through last week's volatility, ground almost to a halt this week as just $2bn of deals were priced.
In Europe, issuance below the triple-A level was just Eu3.9bn as the iBoxx corporate bond index gave up all the gains it had made this year. WestLB and Islandsbanki postponed tier one capital deals, but a few significant issues did get done, notably a Eu825m high yield issue for Cablecom, which used a defensive FRN structure.
Silence fell in Asia's international new issue market, where the sell-off has been particularly sharp after a vigorous bull run. Indonesia persevered with marketing its $1bn-minimum benchmark 10 year bond issue, but is almost certain to delay the bond, at least until after Easter.
The European triple-A market remained solid, with Eu4.7bn of unsecured issues and Eu7bn of covered bonds.
But just one market was still enjoying the credit bull run of the last 18 months — structured finance, and particularly collateralised debt obligations (CDOs), where spreads are still tightening.
European ABS issuers priced nine deals this week, worth Eu4.67bn, and often at aggressive levels.
Three Spanish banks raised Eu850m by securitising their residential mortgages. The triple-A tranche was priced at just 9bp over Euribor and the bonds even tightened 0.5bp in the secondary market.
ABS were not immune to the general widening — secondary spreads softened 1bp-2bp this week, driven in part by the corporate weakening, but also by factors specific to the asset backed market.
However, the market easily absorbed the paper on offer. The ABS market's resilience is attributable partly to the securities' bankruptcy remote structures, which isolate the credit risk of a pool of assets from that of the originator.
But a more pressing factor has been the wellspring of demand for ABS in recent months from a range of new investors, drawn by the higher yields they offer, relative to equivalently rated corporate bonds.
Two sectors of the market even tightened sharply this week, as if nothing had happened in the wider credit markets. A pair of Asian securitisations in the international markets smashed spread records for their asset classes, as European demand wiped out much of the new issue premium that Asian issuers have had to pay in recent years.
Suntec Reit, which owns Singapore's largest shopping and office complex, halved the record spread for Singaporean commercial mortgage backed securities, while Korea First Bank brought a Eu500m residential MBS and knocked 8bp off the spread it paid for a similar deal in November.
And the CLO market — securitisations of leveraged loans, often with an admixture of mezzanine loans and high yield bonds — continued to tighten dramatically as new issues hit record spreads.
CELF Loan Partners, a CLO that JP Morgan priced for the Carlyle Group, issued a triple-B tranche at 155bp over Euribor — some 15bp inside the equivalent spread for the last deal in the asset class, Prudential M&G's Leopard, which was issued in late February.
The surge in demand for CLOs has been supported by the strong performance of European leveraged loans, with low default ratios and high recoveries.