New corporate bond issues tend to appreciate in price when compared to benchmark bonds, providing an incentive for investors to participate in the primary market. As issuance in the corporate bond universe accounts for over 20% per year of the total outstanding amount, the investment implications are significant.

In a new study, conducted in collaboration with academia, we measure the new issuance premium in the European corporate bond market and analyse its determinants. We find that market participants are exploiting this persistent and sizeable phenomenon, but not to the extent that it is arbitraged away. We quantify the opportunity cost incurred by index investors if they participate exclusively in secondary markets.

Key points

• Low interest rates, coupled with shrinking bank balance sheets, have pushed issuance rates for corporate bonds to record levels. Over the last ten years, issuance rates have averaged over 20% per year of the total outstanding amount in corporate bonds.
• Issuance in debt markets is much more frequent and significant than in equity markets, as bonds mature and debts are refinanced.
• In the equity markets, studies on Initial public offerings (IPOs) show that equities tend to outperform post the IPO.
• This study investigates the short-term performance of newly-issued Euro denominated corporate bonds since 2009, while controlling for market and idiosyncratic effects.
• We find a persistent and sizeable new issuance premium (NIP), averaging at 14 bps (80 bps) in spread (price) terms.
• The study shows that there is significant variability in the NIP. The NIP depends on issue risk, market environment and other demand-supply variables, all of which are statistically and economically meaningful.
• We find that investment grade index investors, by not participating in new issues, have historically foregone nearly 20 bps of return per year, which is over 25% of the long-term spread performance of these indices.

Read the full paper here

For professional investor use only.
This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393.
Lombard Odier Investment Managers (“LOIM”) is a trade name.
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