Wednesday, 23 Jun 2021

European investors prove picky even with inflation fears on hold

(BLOOMBERG) – Sales of new bonds in Europe’s primary market resumed at a brisk pace on Thursday, though investors appear increasingly price sensitive amid the first murmurings of an end to stimulus programs.

Some investors walked away from AstraZeneca’s €800 million (S$1,292 million) bond deal on Wednesday, after the spread on offer was cut by more than a third. That followed JPMorgan Chase & Co pulling out of a sale mid-marketing on insufficient demand this week, leaving BNP Paribas to place the deal at a lower price.

“We’re now much more selective on individual names, rather than expecting a general compression,” said Ms Denise Yung, portfolio manager at Lombard Odier Investment Managers. “Rising rates will continue to pressure total returns.”

Inflation concerns may have waned in recent days, with one gauge of European inflation expectations falling to a three-week low, but the question of whether price rises will prove transitory is far from settled.

European Central Bank officials have played down the prospect of any imminent adjustment to the pace of its pandemic bond-buying. ECB President Christine Lagarde has also signalled there will be no major policy shift at the bank’s next meeting on June 10.

Still, more hawkish members of the ECB are due to speak in coming days and the Bank of England’s Gertjan Vlieghe indicated that early rate hikes are a possibility provided there is a smooth transition away from furlough programs.

“Inflation overshooting and leading to earlier-than-expected action is a real risk, possibly later this year,” Ms Yung added.

Europe

Nine issuers including University College London and Citycon are offering new bonds on Thursday, boosting sales for the week to at least €33.5 billion, above the expectations of 85 per cent of respondents to a weekly Bloomberg News survey.

Finland’s Citycon plans to offer exp. EU300m green hybrids.

Belfius Bank plans EU500m no-grow 6Y green SNP, while UCL is lining up a GBP benchmark exp. 40Y sustainable note.

UCL is offering a 40-year sustainability bond, an ESG debut for a UK university and also the longest-dated offering in the sterling market this year.

A potential slowdown in new bond supply comes as a stock rally loses strength, with investors and bankers weighing the speed of the recovery from the pandemic.

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Asia

The pipeline for Asian dollar bond sales remains steady, with Qingdao Jiaozhou Bay Development Group mandating for a possible dollar bond.

Yango Group, Greenland Hong Kong Holdings, Times China Holdings and New World Development Company were all marketing dollar bonds Thursday.

Borrowers are enjoying lower dollar borrowing costs as the Federal Reserve anchors rates.

In a sign of the risks that investors in Chinese company debt face from moves by authorities there to rein in excess leverage, Evergrande dollar bonds were on pace for their biggest declines in eight months Thursday, following a WeNews report regulators are looking into its transactions with a Chinese bank in which it’s the biggest shareholder.

In Chinese credits, investors should look to add selectively debt of companies that have supportable stand-alone fundamentals, according to Schubert at Bank of Singapore.

In comparison with losses on Chinese dollar corporate notes this year, Indian company bonds in the US currency have rallied recently, extending their outperformance amid plans by the government to add stimulus.

US

Three US investment-grade borrowers continued sales momentum ahead of the Memorial Day holiday, issuing over US$6 billion to bring this week’s tally to about US$36 billion.

Interest rate volatility has been sliding as the world’s largest central banks look to damp speculation that inflation will translate into any slowdown in their bond-buying programs.

A rally in the secondary leveraged loan market has helped pave the way for some borrowers to reprice loans and lower costs US junk-bond sales are finally set to slow after already hitting a record for a May month.

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