Bond market's party could be nearly over
GlobalCapital, is part of the Delinian Group, DELINIAN (GLOBALCAPITAL) LIMITED, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 15236213
Copyright © DELINIAN (GLOBALCAPITAL) LIMITED and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
People and MarketsCommentGC View

Bond market's party could be nearly over

A man standing outside with money falling all around him

Primary markets remain in good shape, but they are not firing as well as they were a couple of weeks back

Bond issuers have enjoyed an outstanding run this year, from companies selling bonds in sterling to banks raising additional tier one capital in dollars, and everything in between.

Week after week, fresh money has poured into syndicated deals across the board. Order books have swelled and new issue concessions have often been squashed.

And it has all been driven by inflows from one type of investor: asset managers.

In a trend that took hold last year, new cash has been funnelled into credit, sometimes as a result of top-down decision making by chief investment officers making calculated shifts away from equities into fixed income.

At the same time, private investors have siphoned money out of bank deposits and into money market funds, a higher yielding alternative.

But much of the rise in inflows has been less deliberate and more technical — funds building up due to rates being so much higher than in recent years.

For instance, many companies have found themselves sitting on bigger piles of cash, just by earning more interest, which they have reinvested in money market and short-dated credit funds.

Regardless of the origin of inflows, the choice of allocation by asset managers has been universal: new bond issues.

A first quarter phenomenon

But the primary markets are no longer sparkling as they were, which could be a sign that asset manager inflows are receding.

Take European corporate bonds. The negative concessions and bumper order books of a few weeks ago have been replaced with deals getting stuck at initial price thoughts and paying double digit premiums.

In the financial institutions market, some investors have become more price-sensitive during bookbuilds, while new issues have not always performed well in secondary markets.

Meanwhile, research by JP Morgan found that European retail demand and some traditional mutual funds have experienced a sharp fall in inflows in recent weeks.

For example, in the last week of February, euro high grade exchange-traded funds suffered their largest weekly withdrawal since October 2023 at €763m, or 2.2% of assets under management, according to JP Morgan.

In sterling, weekly ETF redemptions were £135m, or 5% of AUM, the third largest figure since 2010 when the bank began tracking this data.

Such a shift in investor behaviour would make sense. Markets are now fully pricing that the European Central Bank will cut rates at its June meeting. As soon as yields decline, inflows are expected to subside.

Syndicate bankers will be hoping that huge inflows turn out not to be just a first quarter phenomenon but can extend for several more weeks.

What seems more certain is that the recent strength in primary issuance appears unsustainable in the longer term. Issuers would be wise to strike sooner rather than later.

Gift this article