It seems no one in capital markets has thought of anything but political risk for nearly a month. But underneath that troubled surface, the mother of all trades is still there — long duration.
This week’s long bond issue from Deutsche Bank highlighted that one of the most popular fixed income plays this year, for both issuers and investors, is still very much alive.
The €1.25bn 11 year non-call 10 senior non-preferred note, which accompanied Deutsche’s debut social bond, a €500m four year non-call three, found astounding demand, despite all the uncertainties surrounding the French and UK elections.
The French ballot had pushed credit spreads wider, creating difficulties for borrowers of all ranks. But even before the second round of voting on July 7, Deutsche seized the improving market conditions to print.
It found confidence to add the longer tranche, and, yielding 4.53%, a little over 50bp more than its sister tranche, it was an undisputed blow-out, with a final book of €6.4bn.
Strong demand from real money accounts reinforced the signal from the corporate bond market a week earlier, when cash-rich investors splashed it on Heineken’s €900m 12 year and DSM-Firmenich’s €800m 10 year.
These duration trades, largely unseen for most of last year, show that investors remain optimistic about credit.
Sure, Deutsche paid a higher spread than many other European banks, 170bp over mid-swaps, including 5bp-10bp of new issue premium according to rival bankers. But with yields where they are, credit investors are eager to book duration.
The slightly widened spreads since early June have arguably only whetted their appetite.
After all, President Macron’s political thunderbolt when he called an election on June 9 was not the only market milestone last month.
The European Central Bank became the first major central bank to cut interest rates, ending its fastest rate-raising cycle since its inception.
Now, it is expected to cut again, probably in September, and it might deliver another cut later this year.
Politics is generating much uncertainty, and will continue to. But interest rates still look like a one way bet.