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When the Bond Market Gets Choppy: Selling in a Difficult Market
November 5, 2018
The big story in capital markets in October was volatility. It was a pretty choppy month – here are a just a sample of headlines that I noticed:
“Dow tumbles more than 200 points in wild session”
“Dow rallies more than 400 points in bounce”
“Yields dip as stocks dive”
“30-year Treasury Yield Hits more than 4-year High”
Those headlines introduced stories detailing significant moves for both the Dow Industrial and U.S. Treasuries, which are both used as benchmarks for equities and fixed income markets respectively.
The municipal bond market was not immune to this volatility. As we’ve mentioned before in prior blogs, issuers should be cautious about market conditions given the sell-off in long-term yields, the steepening of the yield curve, and investor net outflows. As supply ramps up for the annual end-of-year push, overall demand will be tested given the loss of key buyers on the long end because of changes to the tax code.
Over the course of my career, I’ve had to sell bonds amidst choppy market conditions many times. Trust me, it can be an unsettling experience. If waiting out the volatility is not an option for you as an issuer, it’s time to be laser focused on the fundamentals. Here are a few lessons I relied on to get through a difficult market.
- Determine your flexibility. Recently, we’ve seen large offerings get downsized on pricing day or even pulled from the calendar. This is obviously a signal that market conditions are bad. But it’s also a signal of savy issuers who understand the flexibility of both their financing plans and their sale. It’s vital to work hand-in-hand with your financial advisor and banking team to determine your ideal size and structure that can be well-digested in the market while still meeting your capital needs. For example, perhaps the structure of the bonds can be adjusted so that you only offer on the short and long ends and reduce bonds in the belly of the curve until another time. If the appetite is there and it works with your debt-service profile, great!
- Gather your intelligence. This is where having a superior IR program makes your job as an issuer a lot easier. You need to reach out to your underwriters – and investors if possible – to see if anyone can alert you to red flags. Bankers, traders and analysts can have their fingers on the pulse of the buy-side and can let you know sectors/regions/ratings/coupons that are seeing little (or strong) demand. This type of market intelligence can be hugely beneficial, especially if you have some flexibility. Perhaps no one’s interested in 4% coupons right now, but you have the flexibility to set a 5-1/4%. Maybe that pulls in the additional buyers you need. And talk to other issuers as well. This is a community, and your fellow issuers can be a great resource. Get firsthand details on issue pricing from peers who just dealt with it.
- Develop your game plan. As they say, plan your work and then your plan. Did your intel suggest re-structuring your deal? Based on the results of points #1 and #2, determine if you have the flexibility to make adjustments. Figure out what you need to sell; find out what you can sell; and then take it to market. There are great deals to be made even in the most difficult of markets. And remember, sometimes waiting is just not the answer, especially in a rising-rate environment.
We’ve seen some huge uncertainly in the markets recently. Having to borrow in this kind of environment just further underscores the importance of being proactive as an issuer. Talk to investors, and work with your advisor and banker to access the necessary capital in the most efficient manner.