Corporate bonds

Natural order disrupted in high quality corporate bonds

Top-rated corporate bond issuers are used to having the world of debt at their feet. But markets are so distorted after years of quantitative easing that top-rated names find themselves pushed into tricky deadlines, while issuers a few rungs down seem to be racing for the roost.

European investment grade bond investors are spooked. Stubbornly high inflation – which should still be transitory but still shows little sign of evaporation – combined with swings in the rates market and expectations of monetary policy tightening, has made blue chip issuers the hotspots. prom in the third quarter.

A wave of ‘A’-rated names took advantage, with Germany’s property sector debut clashing with bond market stalwarts like Dutch infrastructure firm Tennet.

But a trend is emerging as these issuers find that they receive a much better response to offers that have very short maturities or are well beyond the belly of the curve.

The short end is seen as a defensive play, especially against inflation, while the long end offers at least a slice of yield that is otherwise unobtainable under current conditions.

In contrast, the five- to eight-year portion of the curve, where issuers generally like to do most of their trading, has little to offer investors and thus becomes a bit of a no-go zone for “A”-rated credits. These companies could in theory price a deal there, but they should expect to pay around 1.5 times to double the new issue concession for fun.

The fact that ‘A’ rated companies have access to the market during this period of uncertainty could be seen as just reward for their strong credit metrics.

But Baa3-rated Belgian pipe maker Aliaxis had enough time to issue 750 million euros last week with a seven-year tenor, so investors still have an appetite for triple-B debt in the range. from five to eight.

A great credit rating should be rewarded with more options for taking on debt, not less. When the “A” team has less wiggle room than their lower-rated cousins, something is clearly wrong.