Confused, worried, relieved. Debt capital markets bankers went through a range of emotions last week, though at least by the end of it they had some deals to celebrate, albeit the broader backdrop remains tense as illustrated by a covered bond issue by France's Caisse de Refinancement de l’Habitat on Friday that required support by leads to get over the line.

US president Donald Trump's so-called reciprocal tariffs announced on April 2 derailed stocks, bonds, commodities and FX markets.

For much of the week, the prospect of any meaningful bond issuance this side of Easter looked bleak as the turmoil Trump unleashed intensified. By the end of play on Wednesday there had been just a handful of deals, mostly in the SSA market in which the European Union and certain German Laender issued, but also one sole corporate in the US – Paychex, which printed a deal on Tuesday.

Many bankers said there was no sense of underlying panic among clients but the price action in the Treasury market told a different story, with the yield on the 10-year benchmark jumping almost 65bp between Monday and Wednesday.

Credit proved more resilient, though cracks also started to emerge. "Wednesday was the first time we saw decent-sized cash bonds selling. Before, it was mostly CDS led," said a senior bond banker in London. "It wasn't your average real money sellers. It was more kind of portfolio trading, hedge fund-type sellers who either capitulated or saw the dislocation between cash bonds and the index, and saw it as an opportunity to get some of their cash bonds off and/or short cash bonds."

By the US open on Wednesday, the huge swings in the Treasury market even led to headlines in international media questioning its exalted status – though the actual yield on the 10-year benchmark at its peak was still lower than at the start of the year. A US$39bn 10-year auction drew strong demand on Wednesday and a US$22bn 30-year auction on Thursday also went well.

Changing tack

Still, with the prospect of more bond market unrest to come, Trump changed tack on Wednesday and announced a 90-day pause on additional levies (beyond the flat 10% rate) on countries willing to negotiate with the US.

The move sparked an immediate about-turn in risk assets and gave capital markets originators the signal they were waiting for. Investment-grade corporates and financials supply in Europe resumed on Thursday and there was also a smattering of issuance in the US.

Yet while the reception of those deals was encouraging, bankers remain incredibly wary. "There's a long way to go before we see a more predictable market," said the senior banker.

That was evident on Friday when CRH's €750m eight-year covered bond required €320m of lead orders to push books past €1bn and ensure it would get done.

There is still a vast array of tariffs in place on countries and across industries. More significantly, the world's two biggest economies are engaged in a trade war after Washington and Beijing announced punitive tit-for-tat moves. Market risks haven't disappeared despite the huge snapback in stocks and credit following Trump's back-pedalling – indeed gold prices on Thursday continued to climb and the term premiums in Treasuries carried on rising while the rally in US stocks faded as the gravity of the US-China moves began to sink in.

"Overall the feeling is one of relief," said a second senior bond banker in reaction to Trump's announcement on Wednesday. "But it's been a weird situation. Every day the mindset has been flipping 180 degrees."

What next?

While the banker said that Trump's pause brought some respite, calculating what the next 90 days might bring isn't clear. "We now have a 90-day ticking time bomb. We've had a big preview of what could happen. But does that help or does it lead to a pause in decisions [on whether to access markets]?"

Perhaps unsurprisingly, his feeling is that issuers need to make the most of the window. "Ninety days in an annual funding programme is a lot. It's a quarter. You've got to use the next quarter," he said.

A FIG capital markets banker agreed. "Clients have been given a three-month window to at least get something done, whether it’s funding or capital. I would be surprised if all clients are not going through that sort of dynamic assessment," he said.

On Thursday, in the euro market two corporates that had already done roadshows for their deals – Australian toll road operator Transurban and Japan Tobacco – took the decision to go ahead, while French lender Caisse Francaise de Financement Local issued a green covered bond. Transurban raised euros and sterling, while Japan Tobacco raised euros and US dollars.

Bankers said investors have remained engaged during the chaos and pre-marketed deals have generated good indications of interest.

As with any deals following a period of intense volatility, the main area of focus was pricing and the extent to which it had changed.

Credit valuations have undoubtedly become stretched.

"Spreads have stayed compressed for so long. There's no difference between a good credit and a bad credit. Really, it's 10bp, 20bp max," said the first banker.

Widening

The average spread for euro investment-grade corporates on an asset-swap basis had been in the sub-100s for much of the past two-plus years, according to the iBoxx index. Such was the jolt that investment-grade spreads got from Trump's announcement that between April 2 and April 7 the index widened from 106bp to 126bp. Between the start of the year and April 2, it had widened by 2bp–3bp.

The overall widening was reflected in Transurban's euro curve, which had moved by between 15bp and 24bp since its deal comprising 10-year euro and 15-year sterling tranches was announced on April 2.

Pricing on the €650m April 2035 note began conservatively at 200bp area over swaps with about 45bp of concession over fair value on offer. Any doubts about market liquidity were dispelled with books climbing past €5.1bn, which enabled the leads to tighten to plus 160bp. Indeed, books went bigger still, to more than €5.2bn, even after tightening. The final concession was 5bp, with the net repricing of the curve caused by Trump's announcement at about 25bp.

Transurban's £300m April 2040 bond was also heavily subscribed, with books swelling to more than £2.2bn. It priced at 145bp over Gilts from a starting point of plus 170bp area.

Only time will tell whether Transurban acts as a benchmark or just happened to land in a sweet spot. "Investors remain cash rich and like the asset class," was the view of one lead banker.

But, as CRH's deal showed, the spectre of Trump's policies still looms large. "The market wants a quick resolution [to the tariffs situation] and then to move on," said the second banker. "But we haven't had that."

Additional reporting by Alex Chambers, Tom Revell and Lucy Frost

Source: IFR