Bonds: spreads static; market awaits UK water review

With prices largely static late on Wednesday in the European corporate bond market, eyes were turning to Thursday's announcement by the UK water regulator of a review that will affect prices for the next five years.
The broad market was little changed. The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 50.7 basis points more than similarly dated government bonds at 1500 GMT, 0.1 bp less on the day.
Traders said the market was quiet and spreads continued to tighten despite stock markets declining and oil prices hitting new highs.
"No one is (worried) at the moment, the market is very strong," said a trader. "Unless there's a massive terrorist attack or a massive outside shock, it's tough to push spreads wider. There's also extremely tight support from the credit derivatives market."
Bonds from auto-makers and telecoms companies, among the most liquid in the market, were unchanged on the day, traders said.
Ofwat, the UK water regulator, aims to ensure water companies can finance themselves and to protect customers. It will announce on Thursday its draft view on how much the companies can charge in order to meet their spending requirements over the next five years.
For bond investors, a key factor is that part of Ofwat's review aims to ensure that companies keep their credit quality stable. With vast amounts of investment needed in the water system, the bond market is the favoured financing route.
"If Thursday turns out how we expect, then you might be getting a knock on your door sooner rather than later from some or all of the UK water companies asking you to buy their bonds," analysts at BNP Paribas said in a note this week.
"It is very likely that most companies will be turning to the bond markets - particularly sterling and euro - if the review is benign," they said.
Sterling-denominated water company bonds were calm on Thursday afternoon, a trader said, with little sign of last-minute positioning.
"This report's been a long time coming. We have seen some weakness over the last week or so, but it's been fairly light," he said. "That said, pricing is fairly defensive at the moment."