By Danielle Robinson
NEW YORK, May 11 (IFR) - Apple, Shell and AbbVie blitzed theUS bond market last week with a combined US$34bn of jumbo bonddeals in just two days, bringing the week's tally to US$52bn,the fourth-largest of all time.
AbbVie issued US$16.7bn to finance its acquisition ofPharmacyclics - it was the sixth-biggest bond deal ever - afterattracting US$60bn of demand.
The next day Apple issued US$8bn on US$21bn of demand andShell US$10bn on US$23bn of orders.
But bankers are warning borrowers planning to raise someUS$80bn or more in May not to be dazzled by the US market'sseeming resilience.
New-issue concessions have bulged in the past week afterwild swings in 10 and 30-year Treasuries and huge supply tooktheir toll. Now there are fears that the bond market has reacheda tipping point, and corporates may face rising funding costsfrom here on.
"The real risk to the market over the course of a busy Mayfor new issues is extreme volatility in Treasuries," said JonnyFine, head of investment-grade debt syndicate in the Americas atGoldman Sachs.
"We have gone from new-issue concessions of zero to 5bp inMarch to a weaker environment where NICs are 10bp-15bp. In thesame period credit spreads have widened a little and Treasurieshave increased a lot, so all-in costs of debt issuance havedeteriorated."
The new-issue market has been able to recover from temporarygluts at various times this year. And, in the absence ofTreasury volatility, it only took a few slow weeks to bringconcessions snapping back in.
Now, although investors still have cash to put to work, notknowing where rates are heading requires higher concessions,especially at the long end of the curve.
It was no coincidence, then, that Apple paid 10bp in NICsand Shell 11bp-16bp on the day the 30-year Treasury yieldpierced the 3% mark for the first time since December.
FUNDAMENTAL
With European government bonds backing up dramatically,commodity prices stabilising and US economic growth expected toimprove, some think the Treasury market is undergoing afundamental shift away from curve flattening, towards a periodof steepening at the long end.
"Many former entrenched trends are now over and thenew long-term trends have begun," said William O'Donnell,head of US Treasury strategy at Royal Bank of Scotland.
"We are going through the earliest phase of a 'term-risktantrum'. What we have witnessed since the end of March ismarkets coming to grips with ongoing improvement in the USeconomy and maybe a nascent recovery out of Europe at a timewhen we are staring at record low European and US yields. It'smaking people have a complete re-think."
Fed Chair Janet Yellen also made comments during the weekthat bolstered that view.
"She sent a signal to the market that stocks have gone toohigh and bond yields are too low at a time when the Fed couldraise rates in September," said O'Donnell.
Although yields tightened on Thursday, the wild swings sawissuers such as Anglo American pay new-issue premiums of as muchas 19bp and most other borrowers that day paid double-digitconcessions across maturities.
ILLIQUID
Matters will be made worse by the illiquidity in thesecondary market.
"Larger new-issue premiums impact future bond pricing to agreater extent than we have seen in the past, due to theilliquidity in the secondary market," said Michael Shapiro,manager on Societe Generale's US bond syndicate.
"The existing secondary curve can widen because of a largernew-issue premium and the result is wider pricing points when anissuer or one of its peers seeks to return to the market."
Borrowers are also likely to find that they can no longerdetermine what they will pay in the bond market based on whatothers are achieving.
"There have been times when the concessions that variouscredits in different sectors paid have been uniform, but this isnot one of those environments," said Fine.
"It's more critical than at any other time for syndicatemanagers to really understand the difference between individualcredits and sectors and how they are likely to be accepted bythe bond market versus others."
Strong order books, however, have shown that demand is stillthere. And bankers and issuers hope that any reduction of demandfor bonds from retail investors (put off by the damage done bywider Treasury yields to total returns) will be offset byinsurance companies and pension funds coming in forhigher-yielding paper.
(This story originally appeared in International FinancingReview, a Thomson Reuters publication) (Reporting by Danielle Robinson; Editing by Matthew Davies)
