Allianz deal shines as bond market drifts lower

The European corporate bond market generally drifted lower in value on Friday, although a new issue for German insurer Allianz drew strong demand and was trading significantly higher than launch pricing.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 61.5 basis points more than similarly dated government bonds at 1600 GMT, 0.2 basis points more on the day.
Allianz drew 5.8 billion euros of orders for its 1.5 billion euro perpetual bond, callable after 10 years. The bond pays a coupon of 5.75 percent and was priced at 143 basis points over Bunds. By mid-afternoon it was trading sharply higher.
"It's going very, very well," a trader said. "It's done nothing but tighten in all afternoon." He quoted the bond trading at 133 basis points over Bunds, 10 basis points tighter from launch.
"Investors were looking for yield," said Cormac Hollingsworth of the financial syndicate at DrKW, a lead manager on the deal. "People saw this as a good way to go long the insurance sector."
Allianz's bond sale comes on top of a five billion euro capital increase last year. It is set to further raise Allianz's solvency but is not expected to enhance the firm's credit rating.
Elsewhere, trading in the secondary market was slow, traders said, with bonds drifting lower in value.
Ford's 5.75 percent bond due in January 2009 was trading about two basis points wider at 162 basis points over government securities, the trader said.
In telecoms, bonds were one to two basis points wider on the day, another trader said, with the move driven by the positions held by investment banks. "Guys are still long on the street, that's clear from the way the market's trading," he said.
However, at current levels the credit derivatives market is expected to provide some support to spreads, with some synthetic collateralised debt obligations (CDOs) in the pipeline, he said.
Synthetic CDOs involve investors selling credit protection in the derivatives market, which pushes the cost of insurance lower, driving spreads tighter.
Investment-grade corporate supply finally gained a fillip on Friday after weeks of virtual silence, as British aero engine maker Rolls Royce Plc named three banks for a benchmark euro bond with an intermediate maturity.