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Make hay while positive yields shine

By Bill Thornhill
17 Oct 2019

The recent bond market sell-off has provided an opportune window for issuers to bring positive yielding deals, boosting demand for SSAs and covered bonds. It’s difficult to imagine this move will prove anything other than temporary, suggesting hesitant issuers should seize the opportunity before it disappears.

10 year Bund yields have risen by more than 30bp since the end of August dragging the rest of the market along for the ride. Given the precipitous 150bp fall that preceded this, a retracement had been long overdue.

The move probably has further to go, but with European growth faltering and inflation subdued, it’s difficult to see this being anything other than a short-term correction in a decade-long trend of declining yields.

Issuers in the covered bond market were quick to spot the opportunity, with a string of positive yielding transactions issued by La Banque Postale, Banca Popolare dell’Alto Adige and Sparkasse Hannover hitting the screens this week. All three were comfortably oversubscribed with order books, that in some cases were two or three times the deal size.

This made for a very conspicuous comparison with negative yielding transactions issued a week earlier by Hypo Tirol, Deutsche Pfandbriefbank and Bawag. None of these deals were subscribed and, for the first time this year, lead managers on all three covered bonds were left holding unsold stock.

It is probably not a coincidence that all three poorly received trades were from banks that at one time or another had received state aid. Moreover, two of the deals were rated Aa1, rather than the triple-A rating more commonly seen among core European issuers.

All three banks have long since turned the corner, but the implication is that investors, who have had a good year and are anxious to protect stellar profits, are becoming less inclined to buy. That reluctance seems all the more conspicuous in the cold light of negative yields.

Although most issuers are ahead of their funding plans and probably have little more to do, the market move seen this week might cause some to sit up and rethink their strategy.

By Bill Thornhill
17 Oct 2019