New Bonds, Big Gains

Over recent months, investors have seen a steady stream of new issuance in the investment grade bond market. Together with consistent supply in syndicated loans, this has created a wide range of opportunities across the risk/return spectrum, making it an opportune time to build a diversified fixed income portfolio.

We know that the new issue process can sometimes feel challenging for investors. Bookbuilds are rapid affairs and orderbooks are frequently many times oversubscribed. Orders can get scaled and often pricing tightens i.e. the final coupon can be lower than the initial guidance, leading investors to feel like issuers have the upper hand.

Despite these frustrations, recent investment grade issuance has delivered strong results for investors. Demand has been consistently strong in the new issue market and remains strong in the secondary market. The chart below reflects the current mid-prices on investment grade bonds issued in the last three months, with the red dotted line indicating the average of those prices.

Source: Bloomberg

All of the bonds are trading above par (100). A handful are lingering between 100 and 101, however majority are trading between 101 and 104, a 1%-4% price increase (or capital gain) in a short time frame.

Among the strong performers, two standouts of note have been BCPE 6.5618% 2035c which is trading at c.105 around two months after issue. In addition, the recently issued ANZ 6.171% 2045 was trading at 102.4 the day it settled.

Although it can be frustrating when a coupon is squeezed during the new issue process, this capital increase along with an annual income return that has typically been in the high 5% to low 6% range, shows that the issuers are not the only winners in the new issue process. Refer to the table at the bottom to see specific issues represented on the chart above.

The opportunity ahead

While the Reserve Bank of Australia (RBA) surprised the market by holding the Cash Rate in July, expectations are that more cuts are on the horizon as the economy broadly slows. The chart below shows that the market is currently expecting three more Cash Rate cuts by February 2026. This provides ideal conditions for the quintessential bond trade – locking in a high level of fixed income and waiting for the Cash Rate to come down. As rates fall the fixed income return will look more attractive, thereby lifting the capital values.

Source: Australian Stock Exchange

The days of 6%+ coupons for investment grade bonds are largely behind us for the time being. However, bonds issued with 5% coupons have also been performing very strongly in the secondary market.

Based on the current dynamics of insatiable demand for fixed income together with falling Cash Rates I expect that, despite its frustrations, the new issue market will continue to deliver solid returns and liquidity for investors for the foreseeable future.

Indicative Mid-Prices of Recently Issued Bonds

Source: Bloomberg

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