Yield hungry European pension funds and other non-US investors are diving into US corporate bonds at a pace that bankers and asset managers said they haven't seen since the financial crisis. In the past month, underwriters have seen a doubling of the percentage of international investor orders in large US dollar-denominated new issues.
European institutional accounts and private banks were actively looking for exposure to higher-yielding and high-quality corporate names, and in a currency that is appreciating. "There has definitely been an increase in the level of interest and activity from European investors," said Andrew Karp, co-head of investment grade debt capital markets at Bank of America Merrill Lynch.
"We've seen that in order books and we hear from many of our investing clients that they are receiving inflows from non-US accounts." Usually, international investors make up about 15% of an order book for a new bond from an investment grade company. But on Tuesday about 30% of the US $39bn order book for Microsoft's US $10.75bn jumbo deal came from non-US accounts, with a notable increase in 'non-traditional' pension fund and insurance company interest out of Europe.
That helped Microsoft not only get more aggressive pricing, but also issue the majority of its deal in maturities of 10-years or longer - a major objective for companies while 30-year Treasury yields are just 2.5%. "It's unusual to see European investors buy long-dated dollar bonds," said one debt capital markets banker at a major bond house in New York.
"With the yield pickup dollar bonds offer over euros you would expect these non-traditional buyers of long-dated debt to be increasingly interested in 20-year plus maturities from the highest quality US corporates." The participation is even greater for names they are familiar with, as Deutsche Bank discovered, when almost 40% of its order book for a US $2.5bn offering of three year fixed and floating rate notes this week came from international investors out of Europe and Asia.
European investors have been pouring money into US Treasuries in the past six months as European government bond yields collapse. That flow has extended into US corporates in recent weeks, since the ECB announced its intentions to buy bonds as part of its quantitative easing program.
"In the past few weeks, we have seen about three or four requests for proposals from large investors in Europe, particularly from France and Germany," said Charles Tan, head of North American Fixed Income at Aberdeen Asset Management, a London-based global asset management firm with a large presence in the US.
"We haven't seen much European pension fund interest in US high-quality corporate bonds, basically since the crisis. That's why it is so unusual to see this many RFPs come in just a few weeks." Their interest mostly centres on bluechip high grade names, but junk bonds are also gaining attention for the more intrepid investors, including those who are part of the private banking contingent from Switzerland and elsewhere. "We are at multi-year wides in terms of the yield differential between US (high yield bonds) and Europe," said Fraser Lundie, co-head of credit at Hermes Investment Management.
"That's driving some of the initial flow back into high yield." The flow is expected to increase, once the impact of the ECB's QE program drives yields even tighter in the Euro denominated corporate bond market. "The ECB doesn't start buying bonds until March so we expect RFPs from European pension funds to crescendo when that occurs. There seems to be some that are already trying to get ahead of that," said Jason Shoup, investment grade corporate bond strategist in the US for Citi.
The attraction is obvious when comparing the coupons on euro-denominated and US denominated bond issues. This week the Triple-A rated Microsoft issued a 10-year bond with a coupon of 2.7%, while Aa2/AA- rated Statoil issued a 12-year in the euro market with coupon of 1.25%.
High yield company GTECH issued dollars and euros this week, and paid 150bp less in yield in Europe - a record differential between the two markets for a junk bond issuer. The hope is that the inflow of European investor money will help improve the performance of the US market and the pricing corporates can receive in the US bond market. "Normally it's the US market that drives Europe, given the relative sizes of the two markets," said Shoup. "But the tail has been wagging the dog in the last six months, with European spreads getting squeezed tighter and tighter.
Comments
Comments are closed.