There are several recent developments in the fixed income space that are distinct from the prospect of higher rates in the US and UK, or the ongoing purchases by the BOJ, ECB, and Riksbank.
Corporates have raised 157 bln euros by issuing investment grade bonds. Some observers have suggested this will be the fuel that spurs a euro recovery. The borrowing will have to be paid back, and it will require the purchase of euros.
There are a few mitigating factors. Some of the funds raised will be deployed in EMU countries. These companies, including some from the US and UK, will earn euro revenues. These revenue streams can be used to service the euro debt. The euros need not be bought, they can be earned.
One of the reasons why euro debt is being raised is that it is cheaper than borrowing dollar or sterling, and maybe yen. That means that flow of debt servicing payments (coupons) are likely to be modest. In addition, the re-paying of the borrowed euros is not imminent. Depending on the circumstances, some companies may consider issuing more euro debt as these bonds mature. Often analysis looks at bonds the asset managers' perspective rather than the debt managers' perspective. Just like the asset manager may want to diversify investments, often corporate treasurers of multinational companies diversify their debt in terms of currencies as tenors.
The 157 bln euros of corporate bonds issued this year may sound impressive, but the euro corporate bond market remains relatively modest. In July alone there was $135 bln of investment grade corporate bonds sold. Of this, $47 bln absorbed by US investment grade bond funds. About $40 bln was used to fund acquisitions. So far this year an estimated $290 bln of bonds were issued to fund M&A activity, which is almost triple, the pace of the year ago period.
The number of issues, however, is less than half of the year ago levels, according to Dealogic figures, suggesting that the average size of the issues is substantially larger. There has been almost $1 trillion in M&A activity in the US this year. Almost 85% of the bonds related to this activity have been sold in the US.
