Bond issuers are starting to fund again at the long end, much to the approval of investors keen to lock in attractive yields, though further supply will depend on the outlook on rates.
A handful of sovereigns and corporates have issued bonds with tenors of 20 years or longer since the start of the year, with momentum picking up last week, as a less hostile rates environment has made longer-dated bonds a much more attractive proposition for issuers and investors.
“There’s a very strong bid at the long end,” said Tommaso Ponsele, co-head of European corporate and CEEMEA DCM at Citigroup. “It’s been there since September, but we hadn’t found issuers prepared to go long. The rally in December has now helped a few to do so in US dollars, and we expect some to follow in euros as well.”
The push into longer-dated funding in the euro market has come instead from SSA issuers. On Tuesday, North-Rhine Westphalia tested the 50-year part of the curve in the euro market – the first time that any borrower has in nearly a year – with a €1bn tap of its March 2073s. "The reality is we've seen bucket-loads of euro supply ... but the market hasn't been given any duration. Everything had been in 10-years," said a lead banker on NRW's deal about the SSA market.
While the lead banker admitted it was a "very niche" trade, it still provided a rare data point for an ultra-long market that has withered after central banks in 2022 hiked rates from their lows. "People aren't buying this on an asset-swap basis. They're buying it for the outright yield," said the banker. Pricing came at 3.192%.
On the same day, Italy tapped the 30-year part of its curve with a €5bn reopening of its October 2053s, which came alongside a new €10bn seven-year note. Both tranches got huge demand but the tap proved more popular, with books of €82bn compared with €73bn for the 2031s. "If you're going to buy anything, you may as well buy long," said a senior SSA banker away from Italy's deal.
EM too
Emerging market sovereigns are also taking advantage. Saudi Arabia made the 30-year bond the biggest of three tranches that made up its US$12bn offering on Monday. It was sized at US$4.75bn and was issued alongside US$3.25bn six-year and US$4bn 10-year notes. Pricing for the 30-year note was 170bp over Treasuries, with the 10-year landing at plus 110bp and the six-year at plus 90bp. “For issuers like Saudi, although their curve is reasonably steep, the spread is fairly tight and overall the yield is still fairly low,” said a lead banker. The final yield on the 2054s was 5.908%.
Marten Bressel, an EM portfolio manager at FIM Partners, said the tranche sizes more likely reflect the sovereign’s broader funding strategy rather than attest to any relative pricing advantage. When final spreads were set, for example, the update showed the 10-year bond had the most demand at more than US$12.5bn compared with US$11.5bn-plus for the 30-year.
“The fact that the issuer decided to upsize the 30-year in particular is clearly a function of their funding preferences,” said Bressel. He also said some of the demand for the longer bond was down to the attractive carry compared with other high-rated Gulf credits.
Better value
Even so, the deal showed that EM sovereigns believe issuing longer is starting to look less expensive, as did transactions in the first week of the year from Mexico and Indonesia in US dollars and Poland in euros.
That’s also becoming evident in the corporate market, with long-dated issuance in US dollars and sterling. In the US market, Energy Transfer last week issued a US$1.75bn 30-year bond as part of a US$3bn dual-tranche senior transaction that included a US$1.25bn 10-year note. The company also issued an US$800m 30-year non-call five subordinated bond.
The 10-year note priced at 155bp over Treasuries, or a yield of 5.595%, while the 30-year senior tranche came at plus 175bp, or 5.985%. Demand was much bigger on the 30-year, at US$9.4bn, compared with US$7.5bn for the 10-year.
On the senior part of the deal, a lead banker said: “The 30-year outperformed the 10-year. We landed the 30-year at a spread of 175bp, which equates to almost 6%. If I’m an investor thinking about this, I would say this is a low-to-mid Triple B name but in a relatively low-beta sector. So I can own a 30-year piece of paper for 6%, and I haven’t been able to do that for a while in a steady rate environment. That’s an appealing proposition to a lot of people.”
Finding borrowers willing to go long in the euro corporate market is proving tougher. While bankers are confident there will be issuance, it’s not currently a priority. “Borrowers are preferring to target the short to mid-point at the moment,” said Ponsele.
He wondered if prospective issuers are missing a great opportunity. “We all say rates are going to rally,” said Ponsele. “But what’s going to rally? It’s probably going to be the front end of the curve in a stagflationary environment, not the mid-to-long end. That’s the story issuers need to buy into.”
Additional reporting by Luke Acton, Edward Clark and Sunny Oh