With­out de­cent Euro­pean in­vest­ment yield lenders are look­ing to the US

Irish Independent - Business Week - - Front Page - Mar­cus Ash­worth Bloomberg Opin­ion

SEPTEM­BER in the Euro­pean cor­po­rate debt mar­ket is of­ten a time of much re­joic­ing. The dearth of ac­tiv­ity in Au­gust is re­placed by a flood of is­suance, tight­en­ing spreads, and a gen­eral feel­ing that bonds are back.

Not this time. This Au­gust has been par­tic­u­larly mis­er­able, and al­most all of the fac­tors that made it that way have ev­ery rea­son to con­tinue.

Only 13 new deals have com­pleted so far, and the spreads – re­flect­ing the cost of bor­row­ing – on about half are wider than when they were is­sued. The mar­ket isn’t com­pletely closed — big name is­suers such as Volk­swa­gen and Com­merzbank to­gether priced about €4bn of new se­cu­ri­ties – but that’s about it.

But you can see why. Yields in Europe can be non-ex­is­tent, but for the same credit qual­ity you can get a de­cent pickup in the US dol­lar cor­po­rate bond mar­ket. The Fed­eral Re­serve’s in­sis­tence on rate in­creases this year have driven the Trea­sury yield curve sig­nif­i­cantly higher com­pared with many Euro­pean equiv­a­lents (Italy be­ing a re­cent no­table ex­cep­tion).

It’s not just the un­der­ly­ing rate – the av­er­age US in­vest­ment grade cor­po­rate spread is nearly dou­ble the av­er­age for the bloc.

There are some tech­ni­cal fac­tors that make euro-de­nom­i­nated new bond sales less at­trac­tive for in­vestors and is­suers alike.

The re­gion’s cor­po­rate bond mar­ket has long had a friend in Frank­furt. The Euro­pean Cen­tral Bank’s cor­po­rate quan­ti­ta­tive eas­ing pro­gram has ab­sorbed €166bn of in­vest­ment­grade is­suance since June 2016, out of nearly €790bn of se­cu­ri­ties that meet its cri­te­ria for pur­chase.

This prop is soon to be taken away. As of next month, the ECB will halve its As­set Pur­chase Pro­gram from the cur­rent €30bn, and stop it al­to­gether by the end of the year.

Any fur­ther cor­po­rate bond pur­chases will be sub­ject to money com­ing in from ma­tur­ing hold­ings that need to be re-invested.

It is go­ing to be a tough wrench see­ing the big­gest buyer in the room step away. Av­er­age spreads over bench­mark gov­ern­ment bonds may al­ready be show­ing the strain.

And there’s more bad news. Euro­de­nom­i­nated bond sales by US com­pa­nies are down 80pc this year com­pared with 2017, Bloomberg News re­ported. Is­suance hasn’t even cracked €10bn. That’s largely be­cause US President Don­ald Trump’s tax re­forms en­cour­aged firms to repa­tri­ate over­seas cash, and that money is start­ing to flee back to Amer­i­can shores.

This has re­duced the need for US com­pa­nies to is­sue off­shore in de­cent size — this year they have slipped from be­ing the big­gest is­suers of euro-de­nom­i­nated in­vest­ment grade bonds to fourth place. And the trend will only get worse. In­vesco es­ti­mates that only $400bn has come on­shore so far, out of a to­tal $1.5 tril­lion.

And cash-rich Amer­i­can multi­na­tion­als such as Al­pha­bet, Mi­crosoft and Ap­ple will also be taking back money they’d pre­vi­ously used to buy Euro­pean se­cu­ri­ties, shrink­ing the pool of po­ten­tial buy­ers of new is­sues.

Fi­nally, there’s the im­pact of the tur­moil in Italy and Turkey. Po­lit­i­cal dif­fi­cul­ties in both coun­tries have stoked un­ease in gov­ern­ment bond mar­kets, which has spread to other coun­tries to vary­ing de­grees. That volatil­ity makes for an un­com­fort­able en­vi­ron­ment to raise money.

All this means the Septem­ber re­bound in new is­suance vol­umes will prob­a­bly be pretty mod­est this year. Com­pa­nies that don’t need to is­sue will prob­a­bly stay away.

There’s one fac­tor from this Au­gust that won’t re­peat it­self in Septem­ber. Ev­ery­one will be back from their hol­i­days.

This sim­ply means there will more peo­ple around to see the abyss star­ing back at them.

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