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Deal Insights

Debt capital markets: No panic as the ‘old normal’ returns

Guests included speakers from nine banks that in aggregate underwrote 42 percent of all global debt and equity in Q1

Despite equity market volatility and multiple geopolitical curve balls so far this year, credit spreads have remained surprisingly healthy. Maartje Bus, Head of Capital Markets, examines the latest debt capital markets developments.


  1. Investor demand for credit has proved “surprisingly” robust and general appetite for investment grade credit remains strong.
  2. Low primary issuance has been a factor in U.S. bond and credit markets, with corporations put off by sweeping reform to the U.S. tax code.
  3. Demographics are supportive of fixed income, with Asia flows making China the third largest bond market in the world.

The ‘old normal’ — volatility, investor discernment, fundamentals, idiosyncratic risk — is slowly returning. And so far, global bond and credit markets appear to be taking it in their stride.

According to a panel of global debt capital market professionals at the recent IFR Capital Markets ECM & DCM Roundtables, investor demand for credit has proved “surprisingly” robust, and general appetite for investment grade credit, in particular, remains very strong.

Despite equity market volatility and multiple geopolitical curve balls so far this year, a combination of low primary issuance and some central bank buying both in Europe and Asia has kept credit spreads surprisingly healthy.

Global high yield corporate debt – quarterly

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This low primary issuance has been a particular factor in U.S. bond and credit markets where corporations have been deterred from going to market following sweeping reform to the U.S. tax code.

This has helped to insulate the market and keep pricing relatively stable.

Maartje Bus quote 1. Debt capital markets: No panic as the ‘old normal’ returns

High yield is a little more susceptible to absolute interest rates and is therefore seeing greater volatility in capital flows, particularly in Europe.

U.S. monetary policy

Meanwhile, good policy communication has also helped keep markets relatively docile in the face of interest rate pressure.

U.S. monetary policy has been very well signaled by the Federal Reserve. The consensus is for two to three more rises this year, while expectations of a break through 3 percent and beyond are receding.

Panelists agreed that, following the placid environment of 2017, almost every asset class is seeing much more volatility as central banks move away from their co-ordinated actions and markets become more idiosyncratic in their behavior.

Global debt capital markets by asset class

This phenomenon was hailed as a return to a more normal market that will continue through 2018.

In turn, this is leading to more discipline in the transaction process. Our speakers explained there is a need to carefully watch [each market] very carefully and to navigate it.

Maartje Bus quote 1. Debt capital markets: No panic as the ‘old normal’ returns

Discerning deal makers

Overall, the panel were sanguine about debt capital market activity for 2018, with levels on track to make it the second-best year for several years.

In this new market, deal makers must be discerning and cognizant of investor preferences and how they relate to specific credit names.

Emerging markets resilience

A particular surprise has been the continued resilience of emerging markets, which in the past have had similar vulnerabilities to high yield.

This robustness is partly because of dollar weakness, partly a response to coordinated global growth, and partly supported by fundamental factors, including very strong balance sheets among issuers and countries with excess capital.

Meanwhile, more standardized products have seen pricing widen in the first few weeks of the second quarter. Covered bonds in April saw a new issue premium of +5 percent compared to typically less than 1 percent in January.

Adjusting to new pricing levels

Our speakers discussed how investors are giving consistent feedback that they aren’t desperate to put money to work anymore.

While investors are likely to take some time to adjust to the new pricing levels, financial institution issuance held up during Q1, driven by a desire to get funding out of the way while the market is stable.

In fact, financials are seen as the biggest growth segment in debt capital.

Financial institution opportunity remains strong with demand from refinancing legacy Additional Tier 1s, second and third tier banks and individual countries and debut senior non-preferred issuances.

European banks may also benefit from U.S. institutional demand credit in the face of low corporate issuance.

A view on MiFID II

Panelists explained they do not see MiFID II as a relevant factor in the market, despite the significant impact on bank processes, as these will be internalized.

In addition, greater transparency around information flows could be helpful in areas such as allocation.

However, there are questions marks around the regulation’s impact on the secondary market and the inability of banks to act as a back stop in the event of a liquidity crunch.

In the longer-term, it looks like demographics are supportive of fixed income, as we see inflows into Asia and from Asia into fixed income in the rest of the world — making China the third largest bond market in the world.

We would like to thank our guest speakers and Keith Mullin of KM Capital Markets for moderating the session.

  • Mark Lewellen, Co-Head of Global Debt Capital Markets and Risk Solutions, Barclays
  • Frederic Zorzi, Global Head of Primary Markets, BNP Paribas
  • Henrik Johnsson, Co-Head of Global Debt Capital Markets and Debt Syndicate, Deutsche Bank
  • Jean-Marc Mercier, Co-Head of Global Debt Capital Markets, HSBC

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