Capital Markets Weekly: Markets continue seeking riskier and long-duration debt

Emerging markets: YPF surprise

• YPF was a surprise issuer on 24 June, placing a USD500 million ten-year bond for development of Vaca Muerta at 8.75% versus 9% guidance, well through Argentina's sovereign curve, with demand of USD1.9 billion.
• Russia successfully tapped its outstanding 2029 and 2035 deals, with USD1.5 billion and USD1 billion respectively, gaining peak demand of USD8 billion. It tightened pricing from 4% and 4.45% to 3.95% and 4.3% respectively. Russia originally issued the 2035 issue in March 2019 selling USD3 billion at 5.1%, highlighting the sizeable subsequent market improvement.
• Serbia sold EUR1.5 billion of 10-year debt, gaining demand of over EUR4.5 billion at 1.62%. Proceeds will repay existing dollar 2020/21 debt.
• Sri Lanka raised USD2 billion of five and 10-year 9-month debt, with USD1.5 billion at the longer term, its longest international sale to date. The two tranches were priced at 6.35% and 7.55% respectively, 25 basis points inside guidance. The five-year portion gained demand of USD1.8 billion from 165 accounts, while the longer tranche gained USD4.4 billion from 290 investors.
• Chile followed its recent dollar sale with a EUR861 million 12-year Green bond, priced at 0.83%. The issuer flagged that the spread of 50 basis points over mid-swaps is a record low margin for Chile, offering a negative new-issue premium of 10 basis points.
• Three Mexican issuers also sold debt:
  • América Móvil raised EUR1 billion of eight-year bonds at 0.783%.
  • Mexico's Banorte sold USD500 million of perpetual non-call 10-year debt at 7.5%, and USD600 million of 6.75% perpetual debt callable after five years. According to Banorte the deal was six-times oversubscribed.
  • Fibra Uno, a real estate investment trust in Mexico City, placed USD1 billion, selling USD400 million for 10 years, and USD600 million for a 30-year term.
• Philippine National Bank, a private sector entity, raised USD750 million of 5.25-year debt priced at 3.39%. The deal attracted over USD3.25 billion of demand, with 240 accounts involved.
• China Railway Construction Corp sold a USD1 billion perpetual deal callable after five years. This was priced at 3.97% to first call versus initial price talk of 4.4%.

Other Debt

• Piraeus Bank has sold EUR400 million of 10 year (non-call five year) subordinated debt at 9.75%, versus reported initial guidance of 10.25%. Demand reached EUR850 million from over 135 investors. The issue is the first Greek bank subordinated deal since 2008. The deal comes against the background of particularly strong performance by Greek sovereign debt: Greece's 10-year reference rate has declined from 4.4% at end-2018 to a low of 2.48% on 19 June.
• The favorable market conditions also have encouraged heavy junk bond supply. The Financial Times reported that at least 10 US high-yield bonds are slated this week, after nine deals were completed last week.
• According to Reuters, the iBoxx euro-denominated corporate bond index reached a record high last week, with average corporate bond yields declining 19 basis points in the week to 21 June to a record low of 0.76%.
• Within corporate supply, a highlight was a EUR1.5 billion hybrid for Merck. It sold 60-year debt callable after 5.5 and 10 years, at 1.75% and 2.875% respectively: total demand exceeded EUR11 billion.
• Irish-based global medication group Medtronic plc sold EUR5 billion of debt with maturities ranging from two to 20 and 30 years, with the latter tranches pricing with coupons of 1.5% and 1.75% respectively. Proceeds will fund a tender for existing liabilities.
• Austria has tapped its "century bond" with EUR1 billion. The deal originally was sold in September 2017, when it raised EUR3.5 billion at 2.112%. The add-on, which gained demand of EUR5 billion, was priced at 1.171%, a one basis point premium. Austria also sold a new EUR3 billion five-year deal. This gained nearly EUR23 billion in demand and priced at -0.435%, the first time a sovereign deal has priced through the ECB's deposit rate of -0.4%.
• Landesbank Hessen-Thueringen Girozentrale (Helaba) sold the first negative yielding covered bond for two years. It placed EUR750 million of five-year Pfandbriefe (mortgage-backed debt) at -0.227%, with demand of EUR1.1 billion.
• Commerzbank has announced plans for a debut AT1 capital issue for at least USD500 million.
• Green Bond issuance has passed USD100 billion within 2019, a record. According to Climate Bonds Initiative on 25 June, June volume has reached USD13.1 billion, bringing this year's total to USD106 billion.

Our Take

Bond markets remain highly-positive, reflecting strong expectations of policy easing and slowing global economic growth.

With EU countries constrained in seeking fiscal expansion by Treaty requirements, and in many cases already struggling to lower heavy debt-stock burdens, fiscal policy is likely to be of limited help, although some easing of EU targets (notably in Italy) could offer marginal stimulus. With limited indicators of structural reform, European debt markets now appear to expect further monetary policy easing and low rates for longer than previously expected, giving additional downside momentum to bond yields. While the FOMC meeting left rates unchanged, US bond markets appear to be discounting up to three rate cuts from current levels.

This climate has translated into record low yields in multiple debt categories, particularly spanning the European markets. Pricing for the Austria 5-year deal suggests a market expectation that the ECB's deposit rate is likely to be lowered further. Overall, this week's supply falls short of the sovereign "deal rush" of two weeks ago but indicates that bond investors are continuing to accept high risk tolerance and longer durations to improve low (and increasingly negative) returns. Heavy US high-yield supply, YPF and Sri Lanka's successful sales, and the reopening of the market to Greek bank subordinated debt are all indicators of such trends.

Posted 28 June 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence