Sales of bonds in Britain’s currency are running at a record pace as issuers rush to get deals done before the country embarks on potentially acrimonious trade talks with the European Union.
January saw 26.5bn pound ($34.7bn) of non-sovereign debt issuance, the fastest ever start to a year as the market sprang to life in the wake of Prime Minister Boris Johnson’s decisive election win.
“Why not issue while the going is good?,” said Gordon Shannon, a portfolio manager at TwentyFour Asset Management. “Things could easily get more volatile later in the year.”
The UK ended more than four decades of EU membership on January 31 and has entered a transition period until the end of this year in which politicians will thrash out the terms of a future trading relationship.
The UK currency fell the most in more than a month yesterday ahead of a major speech in London in which Johnson will threaten to walk away from talks with the EU if the bloc denies him the deal he wants.
An uncertain outcome in negotiations combined with rising anxiety about the impact on global growth from the spreading coronavirus in China, may yet take the sheen off the bond market’s roaring start to the year.
Sterling issuance is continuing apace for now, however, with three new deals in the market on Monday morning from United Utilities Group Plc, Volkswagen AGand the European Investment Bank.
The market got a reprieve last week, when the Bank of England kept rates unchanged with policymakers noting surveys of business activity were picking up.
“There may be some desire to wrap up issuance before Brexit negotiations resume in earnest, particularly with the government’s self-imposed short deadline,” said Kenneth Ward, a fixed income investment manager at Kames Capital Plc. “We have been right to the precipice before, I think there will be hope that common sense once again wins out.”
Non-British borrowers have dominated the sterling market for new bonds so far this year. Germany’s KfW and the World Bank Group’s International Development Association have both raised 1.5bn pound apiece. China Development Bank, the European Investment Bank and Commonwealth Bank of Australia all priced 1bn-pound offerings, data compiled by Bloomberg show.
“It has been a phenomenal start of the year for the market and no one was expecting things to be as good as they are,” said Henrik Johnsson, co-head of capital markets at Deutsche Bank AG. “The pipeline is looking very healthy for February.”
Yields on pound-denominated corporate bonds have tumbled since Johnson’s December election win, tempting borrowers in to the market. It follows the best-ever year for sterling issuance, with almost 113bn pound of non-sovereign debt sold in 2019 as overseas borrowers seized on Europe’s low funding costs.
“I would expect continued strong issuance”, said Shalin Shah, a fund manager at Royal London Asset Management Ltd. “As things stand, demand for the asset class remains robust and issuance will likely continue upwards to meet demand given that pricing remains attractive from an issuer standpoint.”
US companies in particular have fuelled the surge in pound debt sales, raising the most debt in the currency since 2007 as sterling high-grade borrowing costs fell below that of dollars.
Yields on UK sovereign bonds, known as gilts, have tumbled to the lowest in about three months, while sterling corporate bond yields are hovering at about 1.8%, which is still double that of equivalent euro-denominated debt as the European Central Bank continues to pursue monetary easing.
The Bank of England’s decision to wait for more evidence of an economic rebound before cutting rates followed an unexpected rise in a closely-watched measure of UK economic activity to the highest since 2018.
“Looking at the PMI surveys does not suggest companies are at all worried about Brexit right now,” said Luke Hickmore, investment director at Aberdeen Standard Investments in Edinburgh. “There seems to be plenty of appetite from UK investors for new issues.”
A week ago Lloyds Banking Group Plc pulled in more than 1.8bn pound of orders for a 1bn-pound floating covered note, data compiled by Bloomberg show. Similarly, a pound note from National Grid Gas attracted orders for more than five times the deal’s size.
“I think issuers are taking advantage of the market being receptive at the moment,” TwentyFour AM’s Shannon said.