Friday, 20 July 2018

Market sell-off bleeds into new bond issues

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US high-grade issuers were forced to offer higher-than-usual premiums on new bond deals Wednesday following a global sell-off triggered by doubts about President Trump’s reforms.

Six borrowers came with deals despite the risk-off tone, but they paid a price to access the market, which had set a new quarterly record for supply just a day earlier.

Goldman paid a new issue concession of around 9bp on its US$2.5bn 3.75-year non-call 2.75-year deal, compared to 3bp-4bp on its last trade, a US$3bn 5NC4 and 10NC9 priced in February.

Kimco Realty launched its US$400m 10-year deal at T+145bp, the tight end of T+145bp-150bp initial price thoughts, while Santander Holdings USA only managed to tighten pricing to 5bp inside IPTs, launching its US$1bn five-year deal at T+180bp.

“In general issuers are paying a little more concession just because the market is demanding it,” said a buyside trader. “It just shows you where the market has got to.”

The market opened with a weaker tone as new issues sold earlier in the week widened sharply in secondary.

Mining giant Glencore saw its new US$1bn 10-year bond trading at 179bp over Treasuries, 9bp wider from Tuesday’s pricing, according to MarketAxess data.

Dutch bank ING, whose US$4bn trade was the biggest bond in Tuesday’s session, also traded wider after prosecutors announced a corruption investigation.


Analysts said much of the slide in markets was attributable to worries about President Donald Trump’s ability to enact reforms that were at the center of his election campaign.

Trump and Republican congressional leaders appeared to be losing the battle to get enough support in the House of Representatives to pass their Obamacare rollback bill.

The current House Republican rollback plan is scheduled for a floor vote on Thursday.

Doubts about repealing his predecessor’s healthcare program have led to wider questions about Trump’s plans for tax reform - plans that have bolstered the market since his election.

“The immediate cause of the weakness in secondary is concerns that Trump’s legislative agenda is going off the rails,” said one credit analyst.

“The fear is that if he doesn’tmake progress on tax reform, that will start to manifest itself in a more direct way in financial markets, which have rallied on the back of this policy rhetoric.”

Those worries helped push the stock market into its worst day of 2017 on Tuesday, with major US indices shedding between 1.1% and 1.8%.

After a soft start on Wednesday, US stocks were trading flat to modestly higher by late afternoon.

“One of the big questions this year has been whether equity market euphoria or bond market scepticism reflected the correct read on US policy risks with the new administration,” Bank of America Merrill Lynch analysts said in a note.

“It is not yet clear whether this warrants a tactically more defensive stance on credit. But volatility should be higher and we should see more days like this.”

The US high-grade market on Tuesday topped US$370bn in issuance for the quarter, easily the biggest quarter for volume on record. After Wednesday’s six deals - for US$5.2bn in all - the year’s tally is now US$375.631bn, according to IFR data.

But some analysts said the supply surge was contributing to the sell-off, as it was testing the ability of dealer banks to cope with primary volumes.

“Because we’ve had close to US$100bn of supply over the month, dealers are basically long paper,” said Neil Sutherland, a portfolio manager at Schroders.

“Their ability and capacity to absorb selling is more limited.”


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