Ahead of the FOMC’s announcement this week of a half-point hike in US policy rates, benchmark dollar yields continued their upward trend, with the ten-year US Treasury yield trading briefly above 3% for the first time in four years. At the same time, yields on German 2- and 10-year Bunds reached 0.3% and 1%, while spreads on euro zone peripheral risks widened. For example, the 10-year spread between Italian government bonds and German Bunds reached 189 basis points on May 4, from a one-year low of around 85 basis points.
Likewise, negative trends are present in the stock markets. After Amazon shares fell 14% on April 29, with Apple also posting a 3.7% drop, following worse-than-expected results, the Nasdaq index saw a total decline of 15% in April . That left it down 21.2% in 2022, compared to a 13.3% decline for the S&P500 index. The Renaissance IPO index for the United States lost 36% in 2022 to the end of April, down 43% over a 12-month period.
Despite the sharp deterioration in benchmark rates and major equity indices, major transactions continue to be concluded successfully. In the bond markets, TenneT, which operates power grids in the Netherlands and Germany, on May 3 set a record for ESG issuance in the euro-denominated sector. It placed 3.85 billion euros in a four-tranche operation covering maturities of 4.5, 7.5, 11 and 20 years, with coupons of 1.625%, 2.125%, 2.375% and 2.75% . The issuer’s statement referred to “strong investor demand”, with order books “touching the €8 billion mark” after final pricing.
The 20-year tranche revived the “long” segment, whose activity has been constrained in recent weeks by the bond sell-off, but the tranche also illustrates a deterioration in margins and coupon levels. Bloomberg reported that the 20-year tranche was priced at 110 basis points on average swaps, 20 basis points higher than originally forecast, but noted that TenneT paid a spread of 67 basis points for a comparable duration about a year ago. As a further measure of market deterioration, its €1.8 billion end-May 2021 package included 6.5, 10 and 20-year maturities with coupons of 0.125%, 0.5% and 1.125% – although that the demand (of 4 billion euros) was about half of the maximum level reached during the current sale.
Equity market developments also show growing investor caution and less receptivity to further equity selling, with two major pullbacks in the past week for various reasons, although this has been offset by notable secondary success. in Europe :
- BASF announced on April 29 that it had terminated its plan to list Wintershall Dea, its oil and gas business. CEO Martin Brudermueller told BASF’s AGM that he continued to “want to list the company” but explained that as “it has interests in production facilities in Russia…this makes an IPO difficult at the moment.”
- NYSE-listed Chinese internet trucking firm Full Truck Alliance – which runs a mobile app for trucking services – has also withdrawn a major deal, its planned Hong Kong listing worth $1 billion. . Since raising $1.6 billion in an IPO on the NYSE last June, its shares have fallen to nearly a quarter of their value at the time of the sale ($4.95 vs. $19), prompted by an investigation into its activities by China’s Cyberspace Administration to “prevent national data security risks”. The company hopes this – and any penalties – will be resolved by the end of March. The investigation has been ongoing since July 2021 and is preventing the firm from accepting new clients.
- The Finnish insurer Sampo has finalized its sale of shares in the Nordic bank Nordea by doubling a planned secondary offer. Originally announced as covering 100 million shares, it was doubled to raise €1,840 in gross proceeds. The transaction was increased in response to “strong market demand”. Sampo had initially announced last year its intention to sell a 15.9% stake in the bank to focus on its core business, insurance. Previous blocks were unloaded in early September and late October 2021.
Our point of view
This week’s developments with underlying benchmark rates are unsurprising, with persistently high inflation pushing central banks toward tighter monetary policy, including bigger and faster policy rate hikes and a cut. earlier and faster in central bank balance sheets. Markets improved on the FOMC announcement after Federal Reserve Governor Powell indicated that further acceleration of monetary tightening – up to 0.75% increases – was not expected for the moment.
As in recent weeks, the market correction did not prevent the generation of significant investor demand for new transactions in the capital markets, but at a higher cost. TenneT’s ESG sale highlights this, with demand double the level reached for a multi-tranche green bond sale in May 2021, but with much larger coupons, including a substantial widening of the margin for trance. at 20 years.
Despite this, for higher rated borrowers, the impact on debt sustainability seems quite limited in the short term. There are several examples where maturing the stock of high-coupon liabilities and replacing it at current levels allows for a continued reduction in the borrower’s average cost of debt. This is illustrated by an April 26 Cinco Días analysis of Spanish borrowing costs:
- Using Spanish Treasury data for April, he calculated that the cost of new borrowing – across all maturities, from short-term bills to long-term debt – had risen to +0.39% in 2022 from an average by -0.04% in 2021, the first time Spain has achieved a negative cost of borrowing in a calendar year. The upward trend indicates that Spain is paying the highest cost or new debt since 2018, when its average cost was 0.64%.
- Forward rates have risen much more sharply, with Spain’s 10-year yield deteriorating from 0.565% at the end of 2021 to 1.85% at the time of the article, having recently traded above 1.9 % for the first time since 2015.
- Despite this, the average yield on all outstanding Spanish debt has declined since the end of 2021, when it stood at 1.64%, to a record low of 1.55%. This reflects the maturity of old high-coupon debt, such as a 5.85% issue that matured in January at the end of its 10-year term, replaced by a new syndicated operation with a coupon of 0, 7%.
- According to the Spanish Treasury’s October budget forecast, this process will continue in 2022: it suggested that “debt service costs relative to GDP have fallen despite the growth in the stock of debt”. The budget projected that this ratio could fall to levels reached in 2011 (when these costs first exceeded 2% of GDP) based on such substitution effects: Cinco Dias suggests that this substitution benefit will now be less, but that the average cost should continue to fall in the short term.
- Another positive indicator, the average maturity of Spanish public sector debt reached 8.1 years in the first quarter of 2022, compared to 8 years at the end of 2021, after having been 6.5 years in 2015, according to the presentation of the debt. 2022 Treasury.
These trends are replicated in several European markets. Overall, the average maturity of debt has lengthened in many European markets, a key difference from the GFC and Eurozone crisis, as borrowers have reduced rollover and liquidity risks and locking in historically low borrowing costs. Intra-euro zone sovereign spreads are widening nonetheless, linked to the expected acceleration in the tightening of monetary policy by the ECB, but on a more modest scale than in the United States. The negative impacts of wider spreads and higher base benchmark costs will be gradual, at least initially offset by the replacement of longer-dated historical liabilities.
On the other hand, the risks will be considerably greater for weaker borrowers, especially if higher benchmark rates push the nominal cost of borrowing to unsustainable levels – such as double-digit coupons for dollar debt. longer term. Further hikes in benchmark rates – particularly if accompanied by widening spreads – would increase debt sustainability and default risks in the emerging markets and high yield segments.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.