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The big bond squeeze

Any new debt issue offering a scrap of yield has met huge demand from investors in recent months. As money floods into fixed-income funds, asset managers cannot put it to work in illiquid secondary markets, leaving the primary market as their only liquidity window. Small investors complain of being unfairly squeezed out from new-issue allocations. Large investors grumble that all other buyers are inflating their orders. And the elephant in the room? Nervous banks sense that regulators are preparing to pounce on traditional allocation practices in debt capital markets.

It was an unremarkable deal, from a well-known issuer in a busy period in the debt capital markets that didn’t even need an investor call to sell it, never mind a roadshow.

The €500 million 12-year, non-call seven, tier 2 deal from Danske Bank, the largest bank in Denmark, rated BBB by Standard & Poor’s and A- by Fitch, offered a coupon of just 2.75% and priced at a slight discount to yield 2.767%. 

The lead banks, perhaps mindful of high demand for bonds offering any yield, made it clear from the outset that the deal would not be increased in size. At 7.45am on Monday May 12 they indicated terms in the area of mid-swaps plus 165 basis points, implying a new-issue premium of between 10bp and 15bp on this slightly unusual maturity. Within an hour, the book was four times oversubscribed and official price guidance had been cut to 155bp to 160bp over mid-swaps.

By 9.45am it was all done, priced at 152bp over mid-swaps, flat to the secondary curve with no new-issue premium at all. Some 310 investors had submitted orders and the deal had been nine times oversubscribed. The deal tightened 10bp as soon as bonds started trading.

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