Monday, 16 July 2018

Where are you making Nines?

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SwissInvest strategist Anthony Peters remembers the party that celebrated the life and redemption of the Nines

Anthony Peters, SwissInvest Strategist

I WAS HAVING a little tincture the other evening with an old market dog and we did, as we so often do, plough over old fields. Whenever Eurobond veterans of a certain vintage assemble, at some point in the evening, talk will turn to the “Nines”. The Nines are acknowledged by many as being the greatest Eurobond ever.

During a week when AbbVie, a company which pretty much nobody outside the life sciences world has ever heard of, issued US$14.7bn of bonds in one chunk, split over five maturities, it’s hard to believe that in 1986 the issuance of US$1bn by sovereign Canada was a show-stopper – and one that is still fondly remembered today.

The Nines – or Canada 9.00% 29 February 1996, to give them their proper name – were liquid to an extent that modern day traders and investors can only dream about. They were issued in January – in those days the distribution period was commonly a full month – and stood out because they matured on the last day of February in a leap year.

In a head-to-head market that traded “one up”, the Nines worked in US$5m chunks. Imagine, if you can, asking a trader today for a two-way price in US$5m of a bond, any bond, without indicating which way you intended to trade. There was none of the “I’m not axed” nonsense then. If you had declared yourself to be a market-maker in an issue, you made a committed two-way price in it, like it or not.

THE NINES WERE traded off what was known as the “US Pay Canadian” book, along with two other legendary issues, one of which was the Canada 10s of 1995, a US$750m issue which had come out just a few months previously – and please also note that within just four months, the yield on Triple A 10-year benchmark Canada had dropped by 1%.

The other was a quirky little US$150m issue for Farm Credit of Canada, the famed Farm 11-5/8 of 1993. Even these could be traded head-to-head, five up.

The Nines traded like nothing we’ve seen before or since

Alas, the story goes that Dean Witter, the New York white shoe firm, had let it be known that it wanted to pull out of Eurobonds after the 1987 crash and it was somehow decided by the traders in London that they would go out with a bang.

The Farmers were the smallest bond that traded like a big one and they went out and systematically took the Street short while closing their custody account to lending the issue out. This resulted in the mother and father of all buy-ins. The house at the end of the buy-in chain saw the best part of a year’s P&L wiped out on that short alone – along with several careers.

MEANWHILE, THE NINES traded like nothing we’ve seen before or since. During European hours they were often more liquid than even 10-year Treasuries and were frequently used by Eurobond traders instead of Treasuries for hedging purposes.

Not only were they liquid, they also reduced the basis risk which the Treasury/Eurodollar market carried with it. Although the “TED” spread was really a money market thing, it had its equivalent in the Eurobond market where bonds were traded on a price – just like Treasuries – and where the liquidity differential would lead to rapid and violent spread widening and tightening when US bond markets moved in a hurry.

Because of this, many traders took a more holistic approach to their directional risk mitigation and hedged Eurobond longs with Eurobond shorts. The Nines were perfect for this.

However, if you really want to know how important these bonds were, fast forward to February 29 1996. On that night, the successor to the Canadian dealer MacLeod, Young, Weir – it might have been Scotia MacLeod or Scotia Securities by then – laid on a lavish valedictory party to celebrate the Nines’ redemption.

We all stood around, thanking Simon Last for the great idea, toasting the Nines and congratulating ourselves on having survived a whole 10 years on the front line. We felt so special, having been involved in a bond from the day it was issued to the day it matured. We all said that there would never be another bond like the Nines. We were right.

Last week’s AbbVie deal produced a 10-year tranche of US$3.1bn and there was the late announcement of a six-year piece for US$1bn – the same size as the Nines on its own. But I can’t see anybody arranging a knees-up when these things drop off the funding book in however many years. In fact, it’s impossible these days to see anybody, ever, laying on a party to celebrate the life of a single bond. Times have changed.

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