Corporate issuers reflect investors’ concerns
According to a progress report on European bonds by Salomon Smith Barney, total issuance of euro-denominated bonds reached E227bn in the first quarter, up 33% from the total volumes in the predecessor currencies at the beginning of 1998.
One of the most striking features was the quadrupling in bonds from corporations, which itself accounted for nearly half the increase in total issues. Several major companies made benchmark issues – notably BAT, Olivetti and Repsol.
The maturity pattern of issues suggests that investors are nervous about the sustainability of the current low yield regime in Euroland. On the one hand there is extra yield to be gained by extending maturity but, if yields rise, then the longer duration will penalise performance. Only 39% of issues were for more than eight years in 1Q compared with 54% in 1Q 1998 and 48% for the whole of last year. Issues in the 11–15 year category halved in the year.
The most striking feature for SSB in the quarter was the clear enlargement of issue size, reflecting investor concern with liquidity. In 1Q98, issues of less than E250m accounted for 41% of the total. A year later it was only 31%. The proportion of issues over E1bn more than doubled, to 34% of the volume.
The weakness of the Euro in the foreign exchange markets had a drastic impact on the pattern of returns available to global investors. Both the US and Japanese government bonds outperformed their European equivalents by amounts that broadly reflected the currency shift. Within Euroland, non-government bonds recorded significant outperformance, producing a total return (capital gain + income) of 1.04% versus 0.62% from government bonds.
Single A rated issues provided the best return, yet this is the very sector that European investors seem reluctant to embrace fully yet. But BBB have also performed particularly well. Spreads have narrowed particularly in the longer maturities where longer durations have magnified the effect. The giant German Pfandbriefe market rewarded those foreign investors who ventured in, and SSB notes that if that good performance continues, the euro swap spread may remain narrow and restrict supranational institutional issuance. Richard Newell