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Credit Insights

Foreign Banks Dominate New Issue Market

European banks find U.S. market more receptive and with cheaper financing than the European fixed-income market.

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Credit spreads remained steady last week as secondary market trading was light and investors focused on a deluge of new issuance from foreign banks. As highlighted last week, we expect credit spreads to tighten over the course of the year, but we expect the pace of tightening to dramatically slow. As such, we recommend investors to take some profits off the table and return to a normal cash position. That will provide liquidity to take advantage of the significant amount of new supply on the docket (and resulting new issue concession) and retain dry powder. We expect the new issue market to return to a more domestic focus this week as many firms appeared to hold off coming to market last week after being crowded out by the foreign banks.

In closely watched new issue auctions, Portugal and Spain successfully priced EUR 1.25 billion and EUR 3 billion, respectively, of new bonds. Supporting the auctions were China and Japan, which each committed to purchasing significant amounts of the sovereign peripheral nations' debt; also helping were reports that the European Central Bank was actively purchasing Spanish and Portuguese debt in the secondary market in the days leading up to the auctions. Between the secondary market purchases by the ECB and the successful auction, sovereign bonds rallied hard. For example, Spain's 4% notes 2020 traded up 3 points, Portugal's 4.80% notes 2020 traded up 1.5 points, Ireland's 4.50% notes 2020 traded up more than 3 points, and even Greece's 6.625% notes 2020 traded 6 points higher.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.