A vote for volatility

Deals barely subscribed. New issue premiums soaring. Execution windows ever slimmer. And market volatility at unprecedented levels. Could it get any worse? You bet.

When the Greek government late on Friday, 26 June announced it would hold a referendum on any potential debt agreement, it capped a second quarter many fixed income investors would rather forget. For even before the talks collapsed bond markets had moved into uncharted and hostile territory.

The end of the QE rally in mid-April and the severity of the reversal caught almost everyone off guard. But even Super Mario could not come to the rescue on this occasion — indeed, Draghi told everyone to “get used to periods of higher volatility”. A renewed back-up in yields and more pain ensued.

Many issuers chose to give the primary market a wide berth, and several of those who did venture out with new issues — whether covered, senior or subordinated — failed to live up to expectations.

But if we are entering a new era of volatility, it has already been shown that issuers can survive and even thrive in the sub space.

Witness an almost brazen Eu1.5bn 10 year non-call five Tier 2 issue for ABN Amro on 23 June that attracted Eu8bn of demand. Given the circumstances, a new issue premium of 35bp seems a small price to pay. And two weeks earlier the financial institution that most successfully issued into an almost as hostile market was none other than Bank of Ireland with an inaugural AT1.

Complementing these encouraging signs has been a relatively stable performance from bank capital instruments that has certainly not gone unnoticed on the buy-side. “This has gone a long way to making investors more comfortable about the asset class,” says one.

So perhaps it is not all doom and gloom, for bank capital, at least. Tom Ranger, director of funding and collateral management at Santander UK, perhaps captured the mood of the times best after an inaugural £750m HoldCo AT1 for the UK group.

“I guess the very interesting thing, which goes against everything you learnt at school, is that in such volatile markets, the less volatile product is the higher risk product,” he says. “To a certain extent, I would probably have more faith in issuing a hybrid capital instrument today than a triple-A covered bond, which makes no sense from everything I learnt, but that is the life we’re in.”