A dormant bond market
A few smaller developers whose bonds are listed on Catalyst showed weaker balance sheets and rising debt ratios, but this did not impress investors accustomed to high safety in a market that has not seen a default for four years.
However, there are subtle changes in investors' enthusiastic approach to corporate bonds. Valuations of recently conducted issues indicate that investors are increasingly reluctant to accept further reductions in the margins offered in issues. Best's May issue, placed with a record low margin for this issuer (3.1 percentage points above WIBOR 3M with a maturity of over five years), is traded at par, and the latest issue of Cavatina is also traded close to par, with more similar examples.
Issues from a year ago and six months ago are traded at a noticeable premium, but one must remember that up to March (inclusive) the Monetary Policy Council was eagerly cutting interest rates, which paradoxically always helped WIBOR-based bonds. Now, however, the situation is no longer favorable for investors, and in fact is heading in the opposite direction amid fears of rising inflation. And in a sense, symptoms of these changes are already visible in the behavior of professional investors. ING Bank Hipoteczny placed a PLN 1 billion covered bond issue and promised investors a margin of 0.8 percentage points above WIBOR 6M. This is 2 basis points more than in September last year. The difference is so small that it is hardly worth mentioning, but the point is that it could not be placed on better terms than three quarters earlier, and until recently, setting new records in issue conditions was the norm.
Professional investors, especially those keenly interested in covered bonds, have a different perception of the market than individual investors. The latter simply do not know what to do with their cash. Alternatives are low-interest deposits and government savings bonds, which have their limitations (they are not traded and turn out to be quite expensive when early redemption is involved). Professional investors have more instruments to choose from, including wholesale government bonds, whose yields have risen significantly since the US and Israel's attack on Iran. When government bond yields rise, the relative attractiveness of corporate bonds expressed by the spread (difference in yield) between the two types of bonds declines. And it was this element that may have decided that investors demanded a slightly higher margin from ING Bank Hipoteczny. And they got it.
This moment is worth remembering, because perhaps the market has hit a wall and will not accept further margin tightening by issuers. This does not mean that from now on it will only be more difficult (from the issuers' point of view), but only that there is no room for further margin compression. For some time we may see stabilization or a decrease in issuer activity (it is not easy to accept worse market conditions), and the most important factor here is the behavior of government bonds.
Recent days have seen a pullback in yields after the peak of the trend and a somewhat prolonged stabilization. The market looks tired of recent emotions and no one seems sure about the future direction of changes in quotations. On the one hand, developed economies face rising inflation as a consequence of higher fuel prices, on the other hand hopes for a peaceful resolution of the conflict are still alive, perhaps even greater among investors than among the main actors on the political scene. A repeat of the yield jump would probably remind politicians of what price they would pay for continuing military actions.
Emil Szweda, Obligacje.pl
