A Tale of Two Bonds – Primary vs Secondary

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In the ABS market we often refer to the technical around supply and demand which can influence the direction of spreads as a consequence. So whilst primary market issuance has lagged 2018 year to date issuance by around 25%, it’s now starting to catch up and we have seen a very busy couple of weeks of new supply across multiple asset classes and geographies along with the first few long-awaited STS deals, and the emergence of Sonia linked issuance as the accepted new benchmark in the UK.

All primary deals have seen good levels of oversubscription and in the majority of cases have priced at the tighter end of the initial pricing terms. Given the strength of fundamentals in the ABS market and the demand from investors for primary deals, in particular ones which carry the STS label and the new Sonia reference rate, this isn’t at all surprising. However, when you factor in the price performance in the secondary market over the last few trading sessions, we can see a little bit of weakness seeping into the ABS market which is in complete contrast to the primary market and creates an interesting dynamic. We’re seeing the Main and Crossover indices wider and slightly weaker wider credit markets so it’s not that surprising to see trading desks back off a little in wanting to add risk, but having said that there has also been a fair amount of secondary supply via the BWIC auction process and that is all trading reasonably well with  good levels of end-investor participation thus far.

A good example might be the new Prime UK RMBS transaction Lanark 2019-2 (from Clydesdale Bank), which priced yesterday with the GBP AAA tranche at a spread of SONIA +77bps (implying 1.48% of current yield). This was initially marketed with a spread of SONIA +80 area and ultimately saw client interest of almost £600mm for a £300mm tranche, so the lead managers took the opportunity to set the final spread at a tighter level.

Meanwhile, in the secondary market, Lanark 2019-1 , a transaction which was launched in February this year in slightly larger size and around a year shorter, was available on offer from several dealers at progressively cheaper prices over the last few days, to the extent that bonds were trading at virtually the same equivalent spread as the new issue despite being around a year shorter in duration. The new deal is a great result for the issuer but it’s interesting to see the contrasting appetite and pricing thoughts between primary and secondary, often within the same banks, and the opportunities it presents for us and where we place our money when investing across both primary and secondary markets. When we see a change in the value landscape between primary and secondary we are in a position to take advantage of this if a suitable new issue premium is not present.

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