Concern ranged from dealer worries over potential interference in the allocation process to investor fears over anaemic liquidity conditions in the secondary market.
“It is important that we retain flexibility in allocation,” insisted Hakan Wohlin, global head of debt origination at Deutsche Bank.
“All investors do not behave in the same manner. Anchor investors come in early while others want to see how the deal goes and then come in late, expecting to get the same allocation. We must have the ability to drive the allocation process to honour those that commit at an early stage.”
Wohlin also emphasized the extent to which order inflation needs to be effectively managed. “Some small asset managers are going in with huge orders that are not credible,” he said. “You must have the ability to treat different investors differently.”
Even larger investors who can be reasonably assured of getting their hands on bonds in the primary market expressed concern over the situation in secondary. “We can live with secondary market liquidity, but it is seriously affecting our ability to deliver alpha,” mused Georg Grodzki, head of credit research at L&G Investment Management. “To buy a €30 million to €40 million ticket you have to accept some concessions on spread, which erodes the effectiveness of the idea that you have.”
He remains philosophical about the market, however, pointing out “when the markets eventually normalize, this problem will go away”.
Abnormal markets and the impact of the search for yield were also on the minds of issuers at the conference, particularly those in the supranational, sub-sovereign and agency sector.
“We have to look at the way in which we sell our bonds through primary dealers,” declared Anne Leclercq, director of treasury and capital markets at the Belgian Debt Agency. “We really have to question whether it is something that can remain. We need to come up with a new system.”
Günther Bräunig, member of the executive committee at KfW, seemed equally dissatisfied.
“KfW did a €3 billion 10-year deal last week which attracted €4.6 billion in orders and the spread came in dramatically,” he said. “Banks take their fee pot, but are they really taking placement risk?”
Such concerns over the creaking state of the bond market’s infrastructure dominated the ICMA meeting this year.
For more in depth coverage of the challenges facing primary allocation and the looming regulatory threat the process faces, see Euromoney’s June 2014 cover story The big bond squeeze.
