Bond issuers have enjoyed an outstanding run this year, no more so than in the FIG unsecured primary market where order books have ballooned and new issue concessions have collapsed.
Yet signs that the froth could be evaporating emerged last week as new issue premiums increased and unsecured issuance stalled.
The first hint of a shift in momentum appeared when Banco Santander brought a dual tranche syndication to the market on April 15. The Spanish bank paid a double digit premium on its senior non-preferred offering. Such a concession stood in sharp contrast to where unsecured deals had cleared only a week earlier.
Next day, volatility made an unwelcome comeback as rates surged and credit spreads widened. The result was one of the worst days for sentiment in the European FIG market this year. As a result, issuers stood back and re-evaluated the market, while some even postponed planned transactions.
But a less frothy market is not necessarily a bad thing.
Alan Greenspan, the former US Federal Reserve chair, is widely viewed to have coined this usage of the word ‘froth’ back in 2005 when he used it to describe the exuberant state of US real estate — and we all know how that ended.
Meanwhile, FIG bankers have felt for a while that there has been an element of frothiness in the primary market.
Namely, a sense that investors’ overwhelming appetite for newly issued bonds had been driven by the ‘fear of missing out’ on higher yields which they sought to lock in before central banks began slashing policy rates.
Now, bankers say that investors' FOMO has diminished amid expectations that yields will stay higher for longer.
For many, the wake-up call came when the US Consumer Price Index came in above expectations recently. Added to the mix has been stronger US labour market figures and, to a lesser extent, a flare up in the Middle Eastern conflict.
Yet European FIG bankers have remained sanguine about the latest turn of events. For many, the exuberance in the primary market had felt unsustainable and it was only a matter of time before order books and premiums adjusted.
Meanwhile, the good news is that higher yields tend to translate into higher inflows into credit funds, and there is no sign of those abating just yet.
The key difference is that investors are likely to become more selective, while issuers — who have been spoilt for several months — will have to adjust to a more customary backdrop.