Violent repricing sucks air out of credit markets

IFR 2438 - 18 Jun 2022 - 24 Jun 2022
5 min read
EMEA
Sudip Roy

It may be willful optimism but bankers in Europe are hopeful that issuance will soon reappear after a huge repricing of bonds has knocked the impetus that had been building in credit markets in the second half of May and early June.

Not a single investment-grade corporate printed in the euro market last week – the last deals were on June 8 – while from financials the only issuance was two covered bonds, a sector which itself is creaking after some heavy supply in May.

Bankers had indicated last week was supposed to be a big one for bank senior funding, with possibly some capital trades thrown in too after that sector had shown signs of life. Corporates were also lining up new issues, including one from UK pest controller Rentokil Initial, which is marketing a euro/sterling dual-currency trade. But all of these plans were laid to waste following the release of higher-than-expected US inflation data on June 10, which sent a huge tremor through rates markets.

Bankers are now sifting through their pipelines to see which trades could be revived if the market backdrop stabilises. "In addition to Rentokil, which is out marketing, I heard there were three to five other deals that had go/no go calls on Monday. So we might see some supply early [this] week," said a banker.

However, given the tumultuous price moves over the past week bankers are hesitant to look too far ahead. "The issue we have is that every time we get some stability it's back to square one, so we need to reprice secondary, re-evaluate new issue premiums, estimate investors’ preferences on tenors and products. So it makes transactions really tricky," said the banker.

Sooner the better?

While very few European financial institutions or corporates have an urgent need to issue, with inflation data in the US at multi-decade highs, interest rates around the globe going only in one direction and the European Central Bank's net asset purchases stopping in two weeks, some may feel it's better to issue now than later, even if the cost of funding is uncomfortable.

"I think people will try and get on with it but it will be tough," said a second banker. He said even with central banks trying to get on top of inflation (last week, the US Federal Reserve made its sharpest rate hike in nearly 30 years by raising its benchmark rate by 75bp) the market backdrop barely improved – certainly not for long.

"It feels worse for me. There's a huge amount of uncertainty," he said, following the Fed's announcement on Wednesday and an emergency ECB meeting on the same day to counter a spike in Italian sovereign yields.

Although stocks and bonds initially rallied after the Fed meeting, they were given a jolt again on Thursday when the Swiss National Bank surprised investors with an unexpected 50bp hike. It was the first increase in its policy rate in 15 years. The Bank of England also raised rates – by 25bp – on Thursday, although that had been priced in.

Big moves

The moves in rates markets over the past week or so have been some of the biggest ever seen. The difference in the intra-day low yield on the two-year Treasury on June 10, a Friday, and its intra-day high on June 13, a Monday, was 60bp. The two-year was bid as low as 2.819% ahead of the US inflation release on that Friday. By Monday it had surged to 3.417% and by Tuesday the note was bid as high as 3.45%. It was then back down to 3.29% on Thursday.

It was a similar story across other government bond markets, albeit not quite to the same extreme degree. Stocks and credit markets suffered in response, with bankers shaken out of any complacency that might have existed that rate hike expectations for the year had been fully priced into government bond curves.

"Compared to last week, it feels like a different year, never mind a different week," said a third banker on Wednesday. The week before – the first full one of June – had seen some of the riskiest structures get sold, including AT1s and RT1s.

Insurer Aviva, for example, priced just the second RT1 of the year on June 8 – a £500m perpetual non-call 10 note that came at par, to yield 6.875%. That bond has since fallen more than five points and was bid at a yield-to-call of 7.71% on Thursday, according to Refinitiv data.

Now bankers estimate that even Single A issuers will have to pay at least a minimum 25bp new issue premium and that's on top of the widening in their curves. "Look at the global picture, the repricing is violent. The NIP on corporates is not 5bp, it’s 25bp. That’s just wow," said a fourth banker.

Additional reporting by Tom Revell and Helene Durand