SO IT WASN’T the end of ZIRP after all. The Federal Reserve seems set to give us more of its Zero Interest Rate Policy until its December meeting, or perhaps until sometime next year. Or maybe it will never raise rates again. I, for one, thought they would add 25bp to the Federal Funds rate last Thursday because the entry point looked so equitable.
Global stock markets (and crucially China’s) had stabilised, the US presidential primaries are still at the overcrowded, jokey stage and numerous market players and pundits had come to accept a rate rise as a fait accompli. If there ever looked the moment to end a period of unprecedented financial experiment this was it.
Now we have more market volatility to sit out before going through the “will they, won’t they” farrago all over again. This is not a good look for the Fed.
WHILE WE WAIT for Janet Yellen’s next big moment, we can at least expect the Asian G3 debt market juggernaut to start cranking into gear again after its pronounced deceleration since the Chinese equity market meltdown.
Still, it doesn’t seem likely that primary bond execution will return to the standards we have grown accustomed to since ZIRP was rolled out more than six years ago, with 25bp iterations from initial guidance and order books covered by a factor in the high single digits – at least not judging by last week’s deals for Chexim and Shanghai Pudong Development Bank, which had the feel of delicate porcelain about them.
If certain members of the DCM community get their way, of course, any guidance on future order book sizes may be a thing of the past. A move to obfuscate deal-reporting is an unwelcome surprise at this point in Asia’s development.
For the decade-odd that I’ve covered debt capital markets in Asia, the distribution statistics on new issues have been sacrosanct. That is, until a deal has struggled due to fundamental misconception, mispricing or abysmal timing. When statistics are withheld, you know that one of those failings must be true.
There have been 144A offerings with such an embarrassingly minuscule take-up from US accounts that the bankers involved deserved opprobrium for having not taken the Reg S route. And there have been public deals that have effectively morphed into private placements with just a handful of takers.
Now there’s talk of an end to revealing stats on primary deals from Asia altogether. But barring the embarrassingly mishandled dog deal – and bankers are paid big bucks to make sure these don’t happen – I can’t see that anyone is well served by a statistics blackout on new issues. For one thing, it’s a cornerstone of a bank’s pitch book.
There it is in black and white for a potential issuer to see and to compare with rival banks going after the mandate. Absent the statistics as a matter of publicly agreed truth and you enter the dangerous territory of banks embellishing the outcome. Talking up their own books, if you will.
I can’t see that anyone is well served by a statistics blackout on new issues.
HOW MUCH BEARING do the stats have on a bond’s aftermarket performance? That’s a tough one to answer. Back in the days when I flogged bonds out of London in the Eurobond market’s heyday, we had no distribution statistics to go on, although if a syndicate desk was wearing a huge chunk of a new deal, that news soon got out into the market and the spread would rapidly head north.
Nowadays if you see a huge private bank take-up of a new issue, do you short it, perhaps on a hedged basis on the view that the tiniest price run-up will bring out those notorious flippers on the day, or few days after pricing?
Of course, even a “worker” deal, to use the term employed by an old mate of mine who heads syndicate at a Japanese house in London, isn’t too much of a disaster when you can repo the paper out and collect the still decent coupons on offer for a decent positive carry, courtesy of the Fed’s ongoing largesse.
But where do we go from here? DCM bankers in Asia were largely positive on the Fed’s inaction and were expecting plenty of deals to be announced in the coming week.
ONE THING I monitor for signs of rate outlook expectations is the 30-year swap spread to US Treasuries, which had been close to its historically deepest negative earlier this year (the deepest – negative 38bp – was the day after Lehman declared bankruptcy in 2008) but was moving back to positive territory as a Fed rate rise beckoned.
Easy to see the demand/supply dynamic there: pay three-month Libor and receive 30-year fixed for the maximum net present value gain on the fixed leg of the trade, hence the spread moving deeply negative as ZIRP rolled on. It started last week around minus 20bp but after the Fed’s latest delay has gone back to minus 28bp.
Perhaps no rate rise for some time then. And since that spread is also a measure of general credit stress, it should be worth keeping an eye on for those who think the Fed’s continuation of ZIRP is a sign that something is not quite right in the global credit markets.
