September 16, 2016 / 2:12 PM / 2 years ago

Duration risk unlikely to dampen long bond issuance

NEW YORK, Sept 16 (IFR) - The yield on the 30-year Treasury jumped 24bp this week as investors fretted over a possible US rate hike and the perception that global central banks might change tack on monetary easing.

While this has left holders of long-term US Treasuries taking a hit, the move has done little to deter investors from putting money to work in long-term corporate bonds.

“Technicals are still supportive of long-end bond issuance and purchases,” said one syndicate banker. “In fact, with more yield on offer now, we should see more investors putting money into 10 and 30-year bonds.”

This appeal for long-end bonds was on full display this week, when issuers successfully placed over US$10bn of bonds with tenors of 10 years or more.

And while some struggled to tighten spread levels during bookbuilding, most borrowers enjoyed huge oversubscriptions and paid new issue concessions of just a few basis points.

One such borrower was Altria Group, one of the world’s largest cigarette and tobacco companies.

On Tuesday, it raised US$2bn through 10 and 30-year bonds that were priced about 15bp-20bp tighter than initial price thoughts on the back of a US$6.7bn order book.

With an 11bp new issue concession, the 30-year may have come at a price, but interest in the trade amid concerns over tighter monetary conditions simply underscored the strength of demand for long-term corporate paper.

The secondary performance of long-term paper has also been strong.

Altria’s new 3.875% 30-year was trading on Thursday afternoon at 140bp over Treasuries, having been priced at plus 150bp, according to MarketAxess.


Despite the dip in returns and spike in yields, appetite for longer-term bonds, bought largely by captive investors such as insurance companies and pension funds, is likely to grow.

That is because investors are more willing to take duration risk, in the belief that the prevailing low-rate environment may not change too dramatically by year-end.

Based off Fed Fund Futures, the market sees only a 12% chance that US rates may be hiked next week and a 51% chance for a hike by year-end.

Besides, investing in long-term bonds has paid off.

“With increased rhetoric on rate hikes and easy money policies of central banks overstaying their welcome, duration risk has become more than a passing thought for many,” said one credit strategist. “But it is unlikely to change the status quo in corporate bond markets much.”

Even after the recent sell-off, US Treasury bonds with maturities beyond 10 years have still returned over 10%, versus just 1%-6% on shorter maturities, a strategist said.

“We have been recommending clients to view these pockets of volatility as an investment opportunity,” said Craig Bishop, lead strategist for the US fixed income strategies group at RBC Wealth Management.

“We are not opposed to duration risk because if you are of the view, like us, that we are not entering an extended period of US interest rate hikes, the recent spike in yields has actually made seven to 10-year corporate and 15 to 17-year municipal bonds more attractive for an investor.”


Long-end bonds may still account for a decent chunk of overall volumes, but volatility could increase the costs of issuance and prompt some issuers to focus on shorter tenors.

“It is a question of price more than appetite in the high-grade market, and some issuers may decide to stay short because of that,” said one syndicate banker.

Brazilian food company BRF was one such issuer. Investors say the borrower is now considering a 10-year bond, and even then stood down on Wednesday in the face what remained a volatile backdrop following the end of its roadshow on Tuesday.

The company may still come next week, although investors say that BRF - a quality credit and one of the few in Brazil with an investment-grade rating - is in no hurry.

Mexico’s Pemex, on the other hand, was willing to pay the price to go out along its curve on Tuesday as it looked to finance an up to US$1.5bn tender and close its large funding gap.

While the state-owned oil company generated a US$4.3bn book on its US$2bn 30-year bond, it had to stick to initial price thoughts of 6.75% to get it done and pay an approximately 40bp new issue premium. (Reporting by Shankar Ramakrishnan; Editing by Paul Kilby and Philip Wright)

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