Clearly 2020 was dominated by the global pandemic. The ensuing lockdowns, which shuttered businesses across sectors and geographies, put pressure on balance sheets.
There was a clear division between large companies who had the ability to access capital markets and those that didn’t.
Governments did their best to support the smaller participants, but capital markets and central banks did all they could and more to support the larger end of town.
The US Federal Reserve for example even stretched its mandate with its funding of special purpose vehicles (SPVs) used to buy high yield corporate debt and therefore provide liquidity to those companies who would otherwise be without it when credit markets seized up in March/April 2020.
In terms of new issuance in Australia in 2020, it was the Government who really stepped up to the plate and offered the market a huge number of bonds, to fund the historic support programs.
Despite the huge volume, investors seemed not to be deterred by either low yields or long tenors, in part because corporate spreads were temporarily elevated which offered a good opportunity for gains upon a return to normality. The 30 year maturity was tested with the issuance of a 2051 bond, the longest Australian government bond ever. 10 year yields remained below 1% for most of the year with shorter maturities at lower yields.
Recall the RBA has capped 3 year yields at 0.10% (after being at 0.25% for the majority of the year).
These low yields have been no impediment to demand. Bond issues were regularly oversubscribed by 2 or 3 times, and this has continued in to 2021. The Treasury Corporation of Victoria issued $2.5bn for a 5 year 0.5% bond last week with an order book of $6.6bn.
Corporate new issues once again performed strongly. Last year we did a detailed review which you can recap here.
Given almost everything rallied strongly we have not done an issue by issue comparison again, but some highlights include (noting internal rate of return (IRR) is annualised from a period less than 1 year which amplifies returns to date whereas holding period return (HPR) shows actual returns on invested capital regardless of time):
2021 outlook
With interest rates at historic lows (we seem to have been writing this each January for years now…) we would expect we will see a similarly large amount of issuance in 2021.
One of the potential issues flagged consistently in 2018/19 by market watchers was the “maturity wall” facing high yield issuers in particular in 2021. The concern was that yields may have risen from the previous lows around 2016 when a standard 5 year bond was issued, and as such the issuer might struggle to refinance.
That concern seems to have disappeared, with Goldman Sachs already reporting that 2021 has seen a record pace of high yield issuance (rated below BBB-):
All of this should bode well for high yield investors in particular this year, although investment grade issuance should also be attractive. We also expect a variety of issuers to come to market in 2021 as virus concerns recede with vaccination progress but before market interest rates begin to normalise/the probability of the RBA stopping its yield curve control intervention rises.
We believe taking advantage of new issue concessions and then rotating capital will be a key strategy to deliver above market returns this year so new issuance will be keenly watched.