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Yo-yo books: the end justifies the means

Italy football goal 2020 from PA 18Feb21 575x375

Italy lost €45bn of orders from its 10 year bond issue this week when it tightened the spread to 4bp inside initial price thoughts. It was a close echo of when investors pulled €75bn of bids for Spain’s 10 year in January.

Public sector bond bankers, who pride themselves on the nanotechnology of bond pricing, were offended by what looked like a Sunday school picnic degenerating into a food fight.

They are worrying too much. A badly priced bond is one which either widens for no good reason after pricing, or tightens excessively.

Italy’s deal performed fractionally. Spain’s widened slightly, perhaps due to other factors. But since Spain still had €55bn of orders and Italy €65bn, good at the final spread, it is hard to justify claiming either was priced too tightly.

Huge order book moves may shock those used to calmer times, but we are in mega-bubble territory. A drop of €45bn is no sillier than Italy’s peak book of €110bn.

The extreme bond bull run drives both yield-starved real money investors and crap-shooting hedge funds to inflate their orders. As GlobalCapital argued after Spain’s deal, it’s inevitable.

Corporate bonds went through this years ago. Hot demand ought logically to lead to finely priced, aggressive initial price thoughts. In reality, the opposite happens. The sheer scale of demand, and necessary order inflation, mean books can be unpredictable. Starting wide and ramming in is a safe tactic that might be tiresome and ungraceful, but harms no one and nearly always works.

A more interesting feature of both Italy's and Spain’s deals is that, despite these being ultra-liquid govvies, views on fair value were widely dispersed. In light of that, kudos to both issuers for very successful deals.

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