Retail bonds: if not now, when?
If retail investors aren’t getting involved at a time when interest rates are at their highest for a decade and savers are raring to engage, then when are they ever?
With interest rates at their highest for a decade and government bond yields hovering around 2.2%-5%, depending on currency and maturity, retail demand for bonds is alive and kicking.
But most issuers still overlook this pocket of demand, rather than have to prepare a heavier bond prospectus. That means retail investors are left hanging at precisely the time when their contributions have a chance of being meaningful.
For much of the past decade, retail investors lost interest in bonds, because yields were on the floor. If they were going to make the effort to invest money, they were not going to do so for fractions of a percent.
That has all changed in the past two years, and some European governments such as Italy and Belgium have been able to raise vast sums from retail investors.
Other bond investors offer even more yield than most governments, and could benefit too.
But the complexity of the prospectus required for retail distributions in regulated markets favours institutional issuance by a mile.
“The process is, to put it bluntly, more hassle than it's worth for many issuers,” said a debt capital markets lawyer in Paris. “[Issuers] are doing these wholesale institutional transactions fairly easily, and the market is fairly big.”
But now more than ever, so is the retail market.
“During the period of negative rates, there was a pause in the [retail] market,” said a head of FIG DCM in the Nordic region. “But coming from a history — particularly here in the Nordic region — where retail is, and has always been, an avid buyer of bonds and particularly domestic corporate bonds and other triple-A products, […] I would definitely say over the past year or so we've seen that market come back very strongly.”
Despite this apparently compelling logic, the corporate bond market remains profoundly biased to wholesale. “If you're an individual, it's very hard to ask your investment advisers, 'can I buy a bond issued by a large corporate?'" said the lawyer. "They're incapable of finding that sort of offer, or it's very difficult.”
For many issuers, even including retail just seems like more work without enough reward.
When it comes to a new issue, this is understandable. Retail investors can’t compete with the speed and size of orders that can be amassed from institutions.
But the secondary market is retail’s time to shine. Private investors' follow-on demand can help to tighten secondary yield curves, with a funding benefit to follow.
So even if issuers do not want to target new issues at retail, they should consider going through the documentary hoops to enable secondary market participation.
Many German issuers sell bonds with €1,000 denominations that intermediaries buy in the primary market and on-sell to retail in secondary.
The prize for issuers is that retail investors, unburdened by elaborate investment portfolio rules, can offer stickier, more loyal demand than institutions.
There is some evidence that retail-eligible bonds trade more tightly than comparable bonds from the same issuer.
Yet despite heavy disclosure requirements being a major deterrent for issuers to sell bonds in retail denominations, EU regulators are not planning to do away with the wholesale-retail distinction any time soon.
The UK’s Financial Conduct Authority did take a step towards broader retail inclusion by launching consultations to introduce a single disclosure requirement for both retail and wholesale denominations last year, ultimately levelling the playing field for retail investors. But the EU does not show signs of following suit.
“You still very much get the feeling that when you're looking at a retail offering, the [EU] regulators are going to be much more cautious,” said the DCM lawyer. “And certainly, as far as I'm aware, the European Commission isn't working on a new version of a prospectus regulation to reduce the gap between wholesale and retail.”