September is typically the month when the primary bond markets come back with a bang following the summer lull. This year, though, the bang came a month early as global corporate bond issuance hit a record level amid unusually calm and stable markets.
In August, companies across sectors issued close to $120 billion of bonds globally – the highest August figure since records began in 1995, and more than double the $58 billion average, according to data provider Dealogic.
Bond bankers are hoping the risk-asset rally and supportive market conditions will persist throughout the rest of the year, but no one is complacent about the many risks that could derail this fragile optimism.
Top of their watch list are questions over the financial stability of Greece, Spain, Italy, and ultimately the eurozone, combined with central bank intervention in the bond markets and stuttering growth in the global economy.
"There are a lot of concerns out there; it would be wrong for anyone to be complacent that we are in for a sustained period of low volatility," says Peter Charles, head of fixed-income syndicate for Europe, the Middle East, and Africa at Citi in London.
It’s a sentiment some quarters of the buy side share. "Looking back this looks very much like a false rally, built on low volumes in illiquid, whippy markets characterized by a lack of direction," said Nick Gartside, international chief investment officer of fixed income at JPMorgan Asset Management, in an August note.
Warning signal
He added: "Looking forward, one way to use volatility indices is as gauges of complacency. Anchored at multi-year lows, this sends a red alert warning and market complacency could well be shaken by an Indian summer."
For some bankers, though, a credit-market correction should be seen as a necessary evil. Mark Bamford, Barclays’ New York-based head of global fixed-income syndicate, says: "It wouldn’t be surprising if there were was another bout of volatility given how far the credit markets have rallied. Credit market rallies and sell-offs are a positive event. The problems tend to occur when the credit markets are a one-way trade."
However, and leaning towards the side of optimism, Bamford adds: "If a couple of things break the right way we potentially could see a September and October run, and particularly in the credit space, that rivals anything we have seen for a very long time."
Although that can only be judged in the months ahead, for now, and given the uncertain macroeconomic backdrop and the potential for the risk rally to reverse, it is little wonder expectations for issuance in the remaining months of the year are cautiously optimistic.
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| Rob Whichello, co-head of global syndicate at BNP Paribas in London |
"Expectations at this point in time are not especially high for issuance from the corporate sector. A decent September, just not a blockbuster September," says Rob Whichello, co-head of global syndicate at BNP Paribas in London. Partly underpinning this expectation is the aggressively tight funding levels high-grade corporates can achieve, and largely as a result of such a strong investor bid. This creates windows of opportunity.
"We will see more opportunistic funding from corporates, which will be looking at the coupon and Libor levels and may start thinking: ‘Let’s take some funding out of the market at these levels’," says Whichello. "We expect that to happen in September, and as we go through to the close of the year, the focus will switch to pre-funding their 2013 needs."
The attractive levels at which sovereigns, supranationals and agency borrowers can currently fund could provoke a bout of pre-funding too.
"Spreads have tightened a long way, and if anything, that is going to be very compelling for some of these borrowers to complete their funding at these levels and potentially pre-fund 2013 as well," says Whichello.
In August Commerzbank strategist David Schnautz estimated that eurozone countries still have to sell €263 billion of bonds before the end of the year, nearly a third of the €790 billion of bond sales planned for all of 2012.
For financial institutions, new bond issuance is likely to be defined by the European Central Bank’s move, announced officially on September 6 although expected for some time, to start buying bonds to help lower borrowing costs in struggling eurozone countries.
Such positive news could mean "we may see some financials from peripheral countries look to raise senior funding," says Whichello.
Bamford agrees, but says the ECB’s action could provoke financial institution issuance across covered bonds and securitization as well as senior, and specifically from southern Europe.
The threat of a fresh bout of volatility remains a concern, but issuers, investors and bond bankers have almost become accustomed to market volatility in recent years, and should be able to navigate any new wave.
"We’ve been going through a period of heightened volatility for some time now, and as such the likelihood of markets shutting down entirely is rather remote," says Whichello. "From a primary markets perspective the year so far has been good but a strong September will be key for banks to have a successful 2012."