The NAB yield premium

Welcome to Bond Market Moves: the regular Linkedin newsletter that unpacks the new issues that have recently come to market, and explains how you can make the most out of corporate bonds.

Why ‘Market Moves’? Fixed income is seen as the predictable, stable and steady asset class, however the bond market is anything but boring. We aim to provide a regular 2-minute hit of bond market action and show how corporate bonds contribute to a diversified portfolio.?

New market issues are often a great source of value in bond markets.

Last week, NAB launched a new $1.25b - 15 year non-callable 10-year sub- debt (Tier 2 APRA regulated capital) with an initial price guidance of SQ ASW +210 bps (indicative yield of ~ 6.47% p.a.).

Although markets have been adjusting to a “higher for longer” mindset, this was expected to be in high demand due to a range of factors, notably (i) limited supply, (ii) the ability to lock in duration whilst yields are relatively high, and (iii) recent rating upgrades for major bank sub-debt to A- (stable). ?When issuing new bonds to market, issuers will often offer a yield premium to ensure the deal has a high take-up, which reduces their risk of the issue being undersubscribed.

A quick desktop analysis showed the relative value compared with peers.

With a firm orderbook more than $3.5bn (nearly 3x oversubscribed), this was clearly going to be priced tighter for final orders, which often happens with major new issuances.

Sure enough, NAB advised the final yield as SQ ASW + 200 bps (indicative yield of ~ 6.36% p.a.) prior to book close at 1:00 pm.

Bond markets are highly accustomed to raising significant amounts of capital in a very efficient timeframe.

IAM had estimated fair value as around SQ ASW + 195 bps so we were confident to bid on behalf of our clients.

The bidding process usually only lasts around five hours as we are bidding with most of the major financial institutions across the country. There is sometimes only a day’s notice prior to the auction, so it pays to keep your IAM representative aware, if you are looking to participate in these issues.

Due to excess demand in the book, the bond was immediately trading 15bps tighter. In our view, this demonstrates the benefit of participating in primary issuances where there is a clear new issue yield premium embedded in the price guidance.

If you would like to discuss participating in primary transactions, please speak with an IAM representative or sign up to receive an SMS on the announcement of new issues below.

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