AdvertorialJun 28 2017

Tomorrow's yield - trends in credit issuance

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Tomorrow's yield - trends in credit issuance

With an increasing number of governments and companies tapping capital markets to take advantage of record low borrowing rates, bond investors have never had more choice when it comes to diversifying their sources of yield.

But as the global credit market expands, what are the trends and opportunities that investors should be aware of?

2017 set for a strong year for bond issuance

Globally, debt capital markets have enjoyed a healthy first half of 2017 as investors have continued to go down the credit spectrum in pursuit of the higher yields available on investment grade (IG) and high yield (HY) credit. 

Indeed, year-to-date global high yield bond issuance is 37% higher than 2016 levels1. The US HY market in particular saw a surge of activity ahead of the US Federal Reserve raising rates earlier this year – the first week of March 2017 was the busiest week for the high yield primary market since early 20132. Issuance levels for IG markets have also been high, led by an all-time quarterly record for US IG issuance in Q1 20172. Meanwhile European non-financial companies are also forecast for a record year of bond issuance, seemingly “on course to exceed last years’ record €478bn3” according to ratings agency Fitch, as the ECB’s ongoing bond-buying programme continues to keep borrowing costs low.

Rise of the Reverse Yankee

“One trend we’ve seen in the European credit market is the sustained issuance of reverse yankees” commented Nicolas Trindade, senior portfolio manager at AXA Investment Managers, referring to US companies issuing bonds denominated in euros, or less frequently in sterling. 

“Historically we saw a lot of European issuers issuing in dollars – so-called yankee bonds. But the reversal of this trend since 2015 has changed the European corporate bond market as the number of US issuers rises and could surpass French issuers as the largest share of the euro IG credit market. May was the largest month in history for reverse yankee supply.” 

“Reverse yankees can be an attractive option for many US companies as it can be cheaper for them to issue in euros than in dollars, even when you take into account the cost of hedging.” 

Expanding emerging market universe

Emerging markets have also had a bumper year in terms of bond issuance – EM sovereign bond sales rose to $69.9bn in Q1 2017, the strongest quarter on record, while corporate bond sales in Q1 2017 rose 135% year on year4. 

“We’ve definitely seen a pickup in terms of issuance from emerging market economies” says Trindade. “Issuance in local currency bonds in particular has risen over the last couple of years, which obviously is a big positive for governments and corporates, because they can better match their assets with their liabilities.”

Improving global issuance creates currency opportunities

Corporate issuers’ increased appetite for issuing in different currencies has also created the potential for active, multi-currency managers to generate additional alpha. “Aside from the diversification and yield enhancement benefits which exploring the global fixed income universe can bring, it can also provide potential cross-currency relative value opportunities” says Trindade.

 “The bonds which some companies offer in different currencies across the globe don’t always necessarily trade in line with one another. So a bond from one particular issuer can be cheaper in dollars versus euros, or cheaper in sterling versus dollars for example – allowing you to buy the issuer in its cheapest currency.” 

How much debt is too much?

With the global credit universe larger than ever and yields remaining low, “Many investors might say that there is too much debt out there” concludes Trindade. “However I think the market is sustainable, so long as yields don’t rise too sharply, which could create issues for debt refinancing down the line”.

1.    (Source: Dealogic as at June 14, 2017).

2.    Source: Thomson Reuters Deals Intelligence Q1 2017

3.    (https://www.ft.com/content/3217e676-e84b-3adf-9ffb-35b274423393),

4.    (Bloomberg data - https://www.ft.com/content/04eaacc8-155c-11e7-b0c1-37e417ee6c76)

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This communication is for informational purposes only and does not constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services and should not be considered as a solicitation or as investment, legal or tax advice. Opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document, and is . Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

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