Corporate bond issuances are continuing to meet strong demand from institutions looking to decrease ...
Corporate bond issuances are continuing to meet strong demand from institutions looking to decrease their weightings in gilts.
Although after a bumper period of corporate bond issuances over the first half of the year, the level of new paper is now starting to ebb as the money markets enter the traditional summer slowdown.
Net outflows from gilts have coincided with net inflows into corporates over the first two quarters as institutions position their portfolios in line with the new accounting standard (FSR 17) recommendation of using AA rated corporate bond yields, rather than 15 year gilt yields as a benchmark.
Such has been the demand following a run of strong performance, that corporate bonds have been coming to the market at full value, making bargains hard to come by, says Alex Veys, fixed income portfolio manager at Fidelity.
'In sterling, new issuances are generally not getting a discount, but are trading at a fair value, such is the demand for them,' he adds.
Veys says while issuance has been high over the first half of the year, the money markets are now gearing down for summer.
'We have had a lot of issuances in the last month and a half, but it is slowing down now. Issuance will pick up in September, but will be very quiet through July and August and liquidity will be slower. There is a definite seasonality in the issuance calendar,' Veys says.
David Roberts, fixed interest fund manager at Britannic Asset Management, says while there have been a large number of new issuances he believes it is demand rather than supply that has increased year on year.
He says: 'The volume of issuance to the sterling market has been similar to last year, but the difference is that demand this year has been remarkable, especially at the long end of the market.
'The majority of issuers have been good quality industrials and financials, which would have worked quite well even if the market was not as buoyant.'
National Grid and Legal & General have both proffered 30 year issuances in the last month, which were oversubscribed, says Roberts. He says: 'Legal & General's 2031 issuance is an addition to existing paper. They opportunistically decided to raise more capital and because it is rated in the AA rated category, it is ideal for matching pensions fund liabilities.'
Water companies have also been among those taking advantage of the clamour for corporates, Roberts adds.
'We have been starting to see issuance from utilities and, in particular, water companies. They would have struggled to raise capital through the bond markets three or four months ago, but now there is so little paper in the market, they have been able to take advantage of that,' he says.
New issuances of a lower credit rating have been less common and both Veys and Roberts avoid the high yield market. Even issuance from telecoms companies has also been sparse, given the negative sentiment surrounding the sector, although Yellow Pages, a British Telecom spin-off is to issue later in the year.
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