What are investors betting on: attractive yields or fear of risk? A bit of both actually. Our senior bond analyst Catherine Reichlin tell us more in her monthly "Bond Moment".
On my right: interest rates at their highest for 16 years.
On my left:
- geopolitical tensions,
- rising interest
- rate volatility,
- the risk of recession and
- central banks exiting their unconventional policies.
So what are investors betting on: attractive yields or fear of risk? A bit of both actually. They take measured risks, but above all they expect to be paid in return.
The market for new issues – called the primary market - shows us this through:
- strongly positive concession premiums,
- unfilled order books and even
- the withdrawal of issuers before the issue.
Take the example of Acciona Energia, which despite a concession premium of more than 75 basis points over its existing debt, struggled to gather demand for its new green bond maturing in 2031.
According to Bloomberg, this concession premium was 4 times higher than the average premium for 2023. The situation did not end there, as existing bonds – on what is called secondary market - have seen their premiums widen sharply. The premium on the 2030 Acciona bond rose from 116 basis points to 167 on the day the new bond was announced. In other words, its price fell from 95.50% to 92.20% over the session!
More than a decade of central bank intervention, notably through bond purchases, has skewed the levels of a market that no longer knows where "fair value" lies.
On the other side of the Atlantic, the yield of the 10-year Treasury came close to 5%, the highest since mid-2007, i.e. more than 16 years ago.
The experience of these levels is not engraved in the minds of less experienced investors, the same investors who have only very recently realized that bond prices can also fall, even if only temporarily. For many, therefore, this is an unprecedented situation.
This paradigm shift is also reflected in a change in rhetoric. Many analysts are no longer talking about "fair value" but about "adjusted fair value". A value that is not yet clear and that can be costly to find:
- not paying enough can break a deal,
- paying too much raises mistrust.
Neither is desired in an already nervous market.
This mistrust can also be seen in the secondary market: more than half the new bonds issued since mid-October have seen their risk premiums widen after issue. Whereas in the past high concession premiums led to positive performance on the secondary market, this is no longer the case.
In the first three days of the week of October 23, only 54 bonds were issued, compared with 123 during the same period in the third week of September. Issuers and investors are in agreement: now is the time to take measured risks while waiting for a clearer picture.