Corporate bonds wobble despite ECB support

By Laura Benitez and Helene Durand

LONDON, Sept 16 (IFR) - The hectic pace of issuance in Europe's investment-grade corporate market is expected to slow as rates volatility and a softening in sentiment are forcing borrowers to rethink their pricing expectations.

While the primary market remains open, signs of fatigue are becoming evident. On Thursday, ECB-eligible credit Deutsche Bahn sold a 500m 12-year bond that met with lacklustre demand of less than 600m.

The state-owned company was barely able to move pricing during the execution process, printing at 20bp over mid-swaps from initial marketing levels of the low 20s.

"Supply was limited over the summer so people got involved in Deutsche Bahn's bonds [in June and July], but there is more than enough supply now so you don't actually have to buy 0% yielding bonds. I think it's definitely a sign that the market is a bit saturated," one investor said.

Deutsche Bahn's July trade - a 250m five-year - priced at a negative yield.

Nearly 14bn has been issued in the euro IG (Frankfurt: A0EARV - news) market so far in September. At the beginning of the month some issuers were coming flat or even inside their curves. Any premium was in the low single digits. But over the past week concessions have nudged higher with Deutsche Bahn paying up to 9bp on its deal.

Some bankers think markets are in the early stages of a big correction. "We are teetering on the edge," one syndicate official said.

Ten-year Bunds have proven volatile since the ECB kept policy on hold at its last meeting on September 8, moving from negative yielding territory to positive before shifting slightly negative again on Friday.

"Printing deals with negative yields and concerns about the ECB continuing to buy bonds post March 2017 are unlikely to be happy bedfellows." said Frazer Ross, managing director on the global risk syndicate desk at Deutsche Bank (LSE: 0H7D.L - news) .

Some recent new issues have struggled, especially anything that is non-vanilla or high-beta. Telefonica (LSE: 826858.L - news) 's 3.75% perpetual callable Mar 2022 hybrid was bid at 99 on Friday morning, according to Tradeweb, having priced at par last week.

Glencore (Frankfurt: 8GC.F - news) 's 1.875% Sep (Shanghai: 600021.SS - news) 2023s, which came well inside fair value on September 6, are bid 17bp wider then their swaps plus 195bp reoffer level.

"The only reason investors are buying today is because the ECB will buy the bonds off them tomorrow. We've had warning signals this week and I am amazed people are not sitting up and looking more closely at what Bunds are doing. No one is paying much attention," the syndicate banker said.

ECB SUPPORT

But some bankers remain confident that while the ECB continues to buy corporate bonds any correction will be contained and short-lived.

Societe Generale (Swiss: 519928.SW - news) has raised its investment-grade corporate issuance forecast from 240bn to 280bn, and say these volumes can be achieved without impacting spreads.

"I'm sure there will be a market tantrum when the ECB says no-more bond buying at some point, but right now, it is a brave investor that is not following the ECB-driven performance in primary and secondary as they know they're somewhat guaranteed alpha," said Brendon Moran, global co-head of corporate debt capital markets origination at Societe Generale.

The iBoxx non-financials corporate index has edged out by only 4bp to swaps plus 69bp since the ECB meeting - a sign that investors remain sanguine.

The market still expects the ECB to extend its QE deadline, as well as expand the eligibility criteria.

The central bank has purchased more than 22bn of corporate paper since the CSPP started on June 8, with 2.398bn in the week to September 9, the highest weekly amount yet.

"I'm surprised the ECB has managed to get as much as they've got out of the market. They're doing a lot better than I thought they would. The question now is: how long can they continue at this pace? How many more loose bonds are still available to hoover up?" Moran said. (Reporting By Laura Benitez, editing by Sudip Roy and Julian Baker)