Corporate bond issue glut adds to bubble fears

The glut of bond issuance this week has raised concerns that a bubble is building in the corporate bond sector as more and more companies come to market looking to take advantage of the recent spread compression.

A combination of unprecedented demand from institutional investors nervous about the strength of the economic recovery and opportunism among issuing companies wary of interest rates being hiked up soon have also helped stoke the market.

Vodafone placed a large euro-denominated bond yesterday, with Renault and Gas Natural coming to market on Tuesday. Monday also saw Virgin Media, BMW and Manchester United all come to the capital markets in a bid to raise over $20 billion between them.

The strength of the demand has seen spreads on the new issues move in markedly in 2010, considering there have only been 10 days of trading this year.

Euan McNeil, fixed income manager at Aegon Asset Management, says spreads on non-financial credit have on average moved in by 15-20 basis points over the last week.

‘Companies issuing new bonds are not really offering any value when you compare the prices to the secondary market,’ he says. ‘What’s interesting is that even two months ago they would be priced 15-25 basis points back from the secondary market price as a concession to attract buyers. But that has now gone and there is no incentive to buy new issues.’

Twelve months ago when the corporate bond market was in the doldrums, the difference between new issues and the secondary market was nearer 100 basis points.

‘We were already of the view that non-financial credit looked pretty expensive at the year end, but after the last few days it is difficult to argue that there is any value there at all,’ he notes.

Aegon is favouring financials and collaterised debt where valuations are more attractive, McNeil adds.