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The easy money pendulum swings away

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For the first time in a long time, fixed income investors are turning truly picky

The easy times in the capital markets are drawing to a close, and the European Union found out this week that you can go large, or you can go expensive, but not both.

The EU has sent out its latest request for proposals for a new syndicated NextGenerationEU trade, just days after printing €10bn for the programme.

Investors in the new bond were not happy with the prospect of another huge slug of debt so soon after the latest deal from the newest major issuer in euro SSAs. The NGEU tranche of the dual tranche trade on Tuesday sold off in the secondary market, with the spread moving to 12bp through mid-swaps midweek, which is wider than the 13bp through mid-swaps guidance when the deal started book building. It was printed at 15bp through.

It’s hard to imagine this happening last year, when central bank printing presses were thrumming and even deals that printed through curves found space to tighten in the secondary market.

Even three months ago the most prolific supranational and agency issuers were seeing so much liquidity in their curves that they were adding new investors to their books in the form of accounts that only usually bought super-liquid sovereign curves. The party was still in full swing, although there was a growing, abstract, belief that it would end sometime.

That time is now, and the capital markets are moving into a new, more difficult phase. The European Central Bank is cutting net buys from its Pandemic Emergency Purchase Programme at the end of this month, with the bigger Asset Purchase Programme doing the same in the third quarter. Rate rises are widely expected to come before the end of this year.

The free-for-all euro SSA market, created by a seemingly endless wall of ECB cash, is no more. Investors have now got their sights firmly on central banks and inflation, with deals needing to stand out to draw their attention away from macroeconomic worries. As the EU has found out this week, investors will punish issuers for ignoring this.

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