Aramco underlines bid for long-dated credit: IFR
Saudi Aramco returned to the conventional US dollar market on Tuesday with a US$5bn three-part deal, with the 30-year tranche accounting for nearly half the amount raised in spite of further swings at the long end of the Treasury curve.
It was the latest sign that investors are keen to buy 30-year debt or longer from blue-chip corporates, with recently placed long-dated bonds from Alphabet, Siemens and Snam also proving popular. AT&T followed suit on Wednesday with a US$1.25bn long 31-year note as part of its US$3.5bn triple-tranche transaction.
These bonds are being snapped up even though 30-year government bond yields have been particularly volatile over the past couple of weeks as concerns mount over the fiscal outlook in the US and Japan.
The differing fortunes of the credit and rates markets tell their own tale and show how bond markets have been turned on their head. "Long-end credit has definitely been more stable," said a banker involved in the Aramco trade. "It's tended to outperform rates moves."
For credit investors the incentives are clear. Spreads are tight and the outlook is uncertain. "Yet yields look pretty attractive historically, and that is what is enticing buyers into the market," said Eddie Hebert, client portfolio manager at PPM America. "You still have a lot of long-term buyers that need to buy this asset class to get that yield."
The effective yield on the ICE BofA 15+ Year US Corporate Index was just over 6% as of May 27. "People like nice round numbers, and the yield on the long corporate index is 6%,' said Tom Murphy, head of US investment-grade credit at Columbia Threadneedle. 'So as the long end of the Treasury market gets a little bit unhinged, I think that that 6% yield for long corporates is just really something that the yield buyers really find attractive, and there just hasn't been a lot of it.'
Rarity value
The relative dearth of long-dated corporate supply has been a big reason why investors are so keen to buy these bonds in the primary market. Aramco, for example, was the first corporate borrower from Central and Eastern Europe, Middle East and Africa to sell a 30-year senior bond in the US dollar market this year.
The oil giant raised US$2.25bn through its 6.375% June 2055s, which came alongside US$1.5bn 4.75% June 2030s and US$1.25bn 5.375% June 2035s. All three tranches priced in line with fair value, with the deal coming on a day in which Treasuries were rallying.
For Aramco, the tenor fitted its strategy of managing its assets and liabilities. "We've seen that for a number of oil and gas companies that have capex-heavy businesses with super long-life assets it makes sense to have longer-dated debt," said the lead banker.
Yet long-dated bonds are not for every corporate, especially when the 30-year Treasury is hovering around the 5% mark and the yield could yet go higher.
"We haven't seen a 5% yield on the 30-year US Treasury in many years [with a brief exception in October 2023] and so it is the tenor of choice for most investors right now," said Scott Schulte, global co-head of investment grade syndicate at Barclays. "There is incredible demand.
"The flip side is that issuing a 30-year with a 5% base rate and effectively leaving it on the books until it matures or they can call it is a tougher sell for CFOs."
For investors, too, it's not a zero-sum game even if the headline numbers look attractive.
'It might sound counterintuitive but at some point in time, high yields become a distraction and not actually a positive for our marketplace," said Murphy at Columbia Threadneedle. 'Because if that [higher yield] means that people are starting to get really concerned about this fiscal situation, they're starting to get really concerned that the inflationary impact of tariffs is coming, then I think people's focus will be on that, as opposed to, 'remain calm, all is well – let's just focus on yields'.
"Yield buyers like higher yields, but they like higher stable yields,' he said. "And so far in this kind of slow move higher, that's what it's been. But every time we get these bouts of volatility, that's when the yield buyers step back.'
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