Scott Barlow had a polemic in the Globe titled Debt markets’ ‘lunacy’ threatens equity investors:
U.S. credit markets are absurdly overbought and equity investors on both sides of the border will be very much in the way of the inevitable correction when it occurs.
The most common method of gauging whether corporate debt is attractive or expensive is the spread – the difference in yield between a corporate bond issue and a government bond issue of the same maturity. When the spread is low, it is more difficult for investors to generate returns and there is less margin of safety.
The accompanying chart shows that the spread on the riskiest form of corporate debt – high yield bonds – are trading at spreads very close to the pre-2007 lows. At the same time, the CBOE Volatility Index – which uses equity option prices to measure expected volatility and market risk – is hitting all time lows. In other words, debt markets are expensive, and investors are broadly complacent.
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New River Investments LLC hedge fund manager Guillermo Roditi Dominguez’s exasperation with current prices was evident on Twitter last week (where insiders can be particularly blunt on this issue) after a Walt Disney Co. three-year bond was issued: “just saw the disney bond. 20 over [treasuries]. twenty. time to pack it up and go hit the pool. i aint abuyin no more bonds this year [sic].”
Well, fine. But the reference to Disney led me to do a little more digging on the deal:
The strong demand for double A rated company’s offering has allowed the deal to price inside its outstanding bonds, which is a market coup for the technology giant.
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Apple’s outstanding 2.4% May 2023s are quoted at a G-spread of 75bp, suggesting the new issue concession on the 10-year is around 2bp. The 30-year bonds are offering just 4bp of concession, based on where the outstanding 3.85% May 2043 is trading at Treasuries plus 104bp, while the five-year bonds offer a roughly negative 1.5bp concession compared with the outstanding 1% May 2018s trading at a G-spread of 39bp.Outstanding three-year bonds were quoted at a G-spread of 19bp, so the concession on the new bonds was about negative 1bp.
A negative concession is fascinating and in conjunction with yesterday‘s discussion of increased underwriting competition – as well as previous discussions of US corporate bond liquidity – lead me to suspect that liquidity is in very short supply in the States. Where else but in the new issue market can a PM buy $10-million in corporates at a reasonable – albeit historically narrow – spread?
Other Disney commentary led into a discussion of Enbridge (briefly mentioned on May 29):
Other deals Wednesday saw spreads tighten even further from IPTs to pricing, which one banker said was down to Disney beginning with little in the way of new issue concession – leaving investors unwilling to lose out on any further pick-up.
At pricing the four-part trade appeared to carry concessions between flat to 8bp compared with the company’s outstandings.
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“But broadly, after the recent flurry of issuance, most other issuers may need to be a bit more conservative at the start to create momentum in the book.” [said an unnamed banker].Canadian energy company Enbridge did just that – and was able to tighten levels on its 10- and 30-year fixed rate bonds and three-year floaters substantially.
The 10s and 30s were announced with IPTs of Treasuries plus 125bp–130bp and plus 145bp–150bp, while the floater came at Libor plus low 60s.
These levels were pushed tighter to final pricing levels of plus 110bp and plus 125bp on the fixed and plus 45bp on the floater.
At the IPT stage, compared with outstanding 4% October 2023s at a G-spread of 114bp, the 10-year seemed to carry about 11bp to 16bp in concession, while the 30-year had about 15bp to 20bp in concession versus 4.55% August 2043s at G+130bp.
These juicy concessions enticed investors to jump in with orders that subsequently allowed it to tighten levels – and end up paying concessions of negative 4bp and negative 5bp.
Low yields are not confined to the US:
Europe’s lowest government bond yields since the Napoleonic Wars are signaling investors want more action from Mario Draghi.
Instead of a vote of confidence, the most pronounced rally in 200 years suggests the European Central Bank president needs to stave off the risks of stagnation and deflation. Austria, Belgium, France (GFRN10) and Germany can borrow at lower rates than the U.S. as inflation less than half the ECB’s target stokes concern the euro zone will take many years to recover from its longest-ever recession.
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Speculation the ECB will provide more stimulus pushed yields on euro-region sovereign debt to a record-low 1.43 percent on May 30, according to Bank of America Merrill Lynch’s Euro Government Bond Index. Draghi said May 8 the Governing Council is “comfortable” taking action to boost consumer-price growth, which at 0.7 percent in April was well below the ECB’s aim of keeping it just under 2 percent.
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Rates on German 10-year bonds were at 1.37 percent yesterday, less than a quarter of a percentage point away from 1.127 percent reached in June 2012, the lowest since at least 1815, according to “The History of Interest Rates” by Sidney Homer and Richard Sylla. That was the year of Napoleon’s final defeat at Waterloo, after which the Congress of Vienna redrew the map of Europe, leading to the creation of the German Confederation.Germany’s current yield compares with an average of 3.03 percent in the past 10 years. The interest rate for government loans was 3.6 percent in 1944 during World War II and 12.5 percent in 1931 amid the Great Depression, according to the book.
I’m not sure I’d want to be a fixed income manager in Germany in 1944, even if I was seeing 3.6% yields!
I understand that marketing for the NEW.PR.C refunding has commenced, but a prospectus is not yet available.
It was a negative day for the Canadian preferred share market, with FixedReset prices collapsing in the final hour of trading; PerpetualDiscounts were off 1bp, FixedResets got whacked for 44bp and DeemedRetractibles were flat. A lengthy Performance Highlights table is comprised almost entirely of losing FixedResets, with the solitary exception being a FixedFloater loser. Volume was very heavy.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0967 % | 2,511.2 |
| FixedFloater | 4.58 % | 3.83 % | 33,179 | 17.75 | 1 | -1.2857 % | 3,746.7 |
| Floater | 2.90 % | 3.01 % | 47,560 | 19.63 | 4 | -0.0967 % | 2,711.4 |
| OpRet | 4.38 % | -13.81 % | 31,803 | 0.09 | 2 | 0.0000 % | 2,710.5 |
| SplitShare | 4.82 % | 4.22 % | 62,357 | 4.16 | 5 | -0.0318 % | 3,111.5 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0000 % | 2,478.5 |
| Perpetual-Premium | 5.52 % | -2.26 % | 84,910 | 0.09 | 17 | -0.0530 % | 2,402.4 |
| Perpetual-Discount | 5.26 % | 5.27 % | 105,152 | 14.99 | 20 | -0.0086 % | 2,545.5 |
| FixedReset | 4.56 % | 3.75 % | 220,363 | 8.76 | 75 | -0.4410 % | 2,508.8 |
| Deemed-Retractible | 5.02 % | 1.33 % | 154,769 | 0.16 | 43 | 0.0047 % | 2,519.8 |
| FloatingReset | 2.67 % | 2.51 % | 122,560 | 4.13 | 6 | -0.0331 % | 2,482.1 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| TRP.PR.D | FixedReset | -2.62 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-03 Maturity Price : 22.85 Evaluated at bid price : 24.15 Bid-YTW : 4.04 % |
| BAM.PR.X | FixedReset | -2.38 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-03 Maturity Price : 21.33 Evaluated at bid price : 21.33 Bid-YTW : 4.25 % |
| BAM.PR.R | FixedReset | -2.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-03 Maturity Price : 23.50 Evaluated at bid price : 24.82 Bid-YTW : 4.03 % |
| TRP.PR.B | FixedReset | -1.86 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-03 Maturity Price : 20.05 Evaluated at bid price : 20.05 Bid-YTW : 3.61 % |
| MFC.PR.F | FixedReset | -1.75 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.42 Bid-YTW : 4.45 % |
| ENB.PR.Y | FixedReset | -1.69 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-03 Maturity Price : 22.44 Evaluated at bid price : 23.33 Bid-YTW : 4.20 % |
| CU.PR.C | FixedReset | -1.55 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-03 Maturity Price : 23.28 Evaluated at bid price : 24.71 Bid-YTW : 3.93 % |
| HSE.PR.A | FixedReset | -1.44 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-03 Maturity Price : 22.27 Evaluated at bid price : 22.60 Bid-YTW : 3.79 % |
| BNS.PR.Y | FixedReset | -1.43 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.42 Bid-YTW : 3.71 % |
| VNR.PR.A | FixedReset | -1.36 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-10-15 Maturity Price : 25.00 Evaluated at bid price : 25.45 Bid-YTW : 3.98 % |
| BAM.PR.G | FixedFloater | -1.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-03 Maturity Price : 21.44 Evaluated at bid price : 20.73 Bid-YTW : 3.83 % |
| MFC.PR.J | FixedReset | -1.21 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2018-03-19 Maturity Price : 25.00 Evaluated at bid price : 25.22 Bid-YTW : 3.72 % |
| RY.PR.Z | FixedReset | -1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-03 Maturity Price : 23.22 Evaluated at bid price : 25.16 Bid-YTW : 3.68 % |
| ENB.PR.B | FixedReset | -1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-03 Maturity Price : 22.88 Evaluated at bid price : 23.80 Bid-YTW : 4.12 % |
| SLF.PR.G | FixedReset | -1.03 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.12 Bid-YTW : 4.46 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.H | FixedReset | 1,106,001 | New issue closed today. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-03 Maturity Price : 23.10 Evaluated at bid price : 24.86 Bid-YTW : 3.75 % |
| CM.PR.K | FixedReset | 464,641 | Called for redemption. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-31 Maturity Price : 25.00 Evaluated at bid price : 25.27 Bid-YTW : 1.70 % |
| NA.PR.S | FixedReset | 182,828 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-03 Maturity Price : 23.24 Evaluated at bid price : 25.22 Bid-YTW : 3.85 % |
| RY.PR.L | FixedReset | 162,850 | YTW SCENARIO Maturity Type : Call Maturity Date : 2019-02-24 Maturity Price : 25.00 Evaluated at bid price : 25.92 Bid-YTW : 3.45 % |
| HSB.PR.E | FixedReset | 124,070 | Called for redemption. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-30 Maturity Price : 25.00 Evaluated at bid price : 25.39 Bid-YTW : 3.62 % |
| CM.PR.M | FixedReset | 107,754 | Called for redemption. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-31 Maturity Price : 25.00 Evaluated at bid price : 25.34 Bid-YTW : 1.76 % |
| There were 60 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| TRP.PR.D | FixedReset | Quote: 24.15 – 24.95 Spot Rate : 0.8000 Average : 0.4743 YTW SCENARIO |
| TRP.PR.B | FixedReset | Quote: 20.05 – 20.45 Spot Rate : 0.4000 Average : 0.2238 YTW SCENARIO |
| CU.PR.D | Perpetual-Discount | Quote: 24.30 – 24.85 Spot Rate : 0.5500 Average : 0.3830 YTW SCENARIO |
| BNS.PR.Y | FixedReset | Quote: 23.42 – 23.88 Spot Rate : 0.4600 Average : 0.2962 YTW SCENARIO |
| BAM.PR.X | FixedReset | Quote: 21.33 – 21.79 Spot Rate : 0.4600 Average : 0.3093 YTW SCENARIO |
| PWF.PR.R | Perpetual-Premium | Quote: 25.51 – 25.83 Spot Rate : 0.3200 Average : 0.1918 YTW SCENARIO |