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* 12-year bonds popular as investors hunt for yield
* Funding costs have dropped at the longer end
* EnBW prints its lowest ever coupon
By Charlie Thomas
LONDON, May 30 (IFR) - Corporates are taking full advantage of the bid for duration to extend their curves at competitive costs, despite investor fears that the balance has tipped too far in favour of borrowers.
EnBW and Unibail priced 12-year bonds this week, the latest in a string of corporate issuers in the market selling longer dated debt. In recent weeks, Prologis, GDF Suez and Diageo have all printed dozen-year deals, while financials have also been pushing out the curve with 10-year and longer offerings.
“With any gains from the peripheral rally now almost over, investors are forced to look at lengthening duration to pick up yield,” said Georg Grodzki, head of pan-European credit research at L&G.
Ten-year Italian yields have fallen from 4.22% at the tail end of 2013 to 2.95% this week, while Spanish yields at the tenor have dropped from 4.23% to 2.85%.
“Insurers and pension funds are struggling with the low-yield environment so they’re keen to extend duration. If you expect interest rates to rise, you would normally shorten your duration, but in the euro market it seems some investors are fearful that Bund yields may decline even further,” said Grodzki.
This has certainly been the case so far this year. Ten-year Bund yields hit 1.33% this week, having ended 2013 at 1.94%.
Stephen Yates, head of fixed income beta for EMEA at State Street Global Advisors, said that German and US government curves are steep up to 10-years but relatively flat beyond, meaning that terming out beyond that point was less expensive.
“Also the longer end of the bond market has rallied this year, flattening the curve further, and signaling demand for longer dated bonds,” he added. “This has bought down funding costs in the longer end for issuers.”
Euro corporate issuance including financials has reached some 360bn for 10-year and longer maturities so far in 2014, according to Thomson Reuters data. Issuance out to five-years, by contrast, is only around 172bn.
Pension funds and insurers, as well as asset managers, have been behind this demand, hoovering up corporate bonds.
EnBW’s 500m 12-year deal saw 55% picked up by insurers and pension funds, with asset managers buying another 37%.
Unibail’s 600m bond was dominated by insurers and asset managers, who bought 42% and 45% respectively, while banks and private banks picked up another 12%.
The deals were well received despite the fact that there is less and less reward left for investors.
The coupons on both issues were just 2.5% - for EnBW, the lowest in its history at any maturity.
“The interesting thing is the 12-year swap curve is almost at the lowest it’s been since May 2013, but it seems investors are willing to ignore that and buy the paper anyway.”
While issuers have been making the most of conditions, analysts have warned it is not a one-way street, and that investors are getting more exposed to any potential change in the market backdrop.
“So far everyone’s benefiting from the falling yields but clearly the upside for investors is diminishing and the downside is increasingly higher,” analysts at Societe Generale wrote this month, adding that spreads could widen in a sustained fashion if corporates misjudged the strength of the recovery and releverage aggressively.
They also warned of the risks of higher underlying government yields, which could erase much of the performance earned by credit so far.
“It is hard to see inflation and growth accelerating aggressively but central banks could start the tightening process too early and surprise the markets,” they said. (Reporting By Charlie Thomas, Editing by Helene Durand, Julian Baker)