An inverted yield curve usually heralds a recession, but judging by how well primary bond markets have performed this year, you wouldn’t know one was threatening.
FIG issuance has been exceptionally robust so far this year, with the covered bond market recording its second strongest January in more than a decade, for example.
Demand for riskier forms of subordinated bank debt from lower rated, smaller issuers has improved since the start of this year, suggesting investors are keen to move up the risk ladder.
Taking advantage of this improvement, Alpha Bank announced plans to market its debut additional tier one offering on Monday.
In investment grade corporate bonds, issuance volumes have not breached records but issuers are printing deals with negative new issue concessions and selling hybrid deals once again, the riskiest paper they offer.
Emerging market issuers, fresh from a bleak 2022, have just sold the biggest volume of new bonds on record for a January. CEE sovereigns accounted for 44% of the $37.5bn-equivalent of issuance, while a single deal from Saudi Arabia made up over a quarter of the total as money flows back into EM bond funds.
The wall of fresh money coming into the capital markets is typically strong at the beginning of the year, but the sheer weight of demand for the riskier forms of debt this year defies logical explanation from the standpoint of the inverted curve and what it implies.
Even though the International Monetary Fund recently revised its global growth forecasts higher, it’s fair to assume that, at some point, the impact of quantitative tightening and higher interest rates will have a more profound impact on economies than they have so far.
Moreover, an escalation of the Ukraine war is quite possible as the West sends tanks, planes and long-range missiles to help repel Russian invaders.
But these bleak fundamentals have barely dented risk appetite, warranting perhaps a more esoteric line of reasoning.
'Savings glut'
One such explanation may simply be down to demographics, with the glut of savings borne from the retiring baby boomers being too important to ignore.
The former Federal Reserve governor, Ben Bernanke, alluded to this in 2005 when he referred to “a global savings glut”.
In 2016, the Bank of England opined that there could be “little to no reversal of the impact of demographic forces on global real rates in the years ahead”.
“Baby boomers” are the cohort born during the 20 years that followed World War II. They are now retirees who could continue to exert an excessive surplus in savings throughout the rest of this decade.
This view is corroborated by the investment bankers’ eternal mantra that the success of any given deal is propelled by the quantum of fresh money coming into it.
There is always, inevitably, fresh money to be put to work. And it must be put to work, it seems — offering further explanation for what looks like such bullishness this year.
Institutional investors, investing on behalf of their retail clients, simply cannot afford to let cash idly sit on the sidelines.
Left to their own devices, probably few end investors would want to buy a bond that pays 5% when inflation is running at 10%. The only deals that have come close to matching the effect of rising prices have been from issuers in countries as troubled as Turkey.
But professional investment managers can hardly command a fee by holding their clients’ cash all year. They are also subject to rules that compel them to deploy into assets even though the short term risks can look perilous.
Put simply, their inability to sit in cash and abhorrence of doing so, especially when their peers are piling in, is a factor in the buy-side’s apparent confidence, driving issuance volumes up despite the risk of the economy heading in the other direction.
After the disruption of 2022, they may feel compelled to buy whatever’s available in 2023.
While the savings glut is likely to remain a feature of markets for several more years, it’s difficult to reconcile this with the very short term approach that forces investors to buy simply due to the fear of missing out.
But perhaps the twist is that the bond buying swarm is exactly what will help protect investments. A correction is may well be coming, but with everyone looking to buy the dip, you have to wonder how meaningful it will be.