January was an epic month in the corporate bond market, with primary issuance in euros exceeding EUR48 billion, well over a third of the total refinancing due in 2009. There was strong, if less spectacular, supply in the dollar market, which had its best month for new issues since May last year. In explanation market participants point to backed-up investor demand, asset allocation away from the beleaguered equity market and generous yields, interacting with low underlying rates which take some of the pain of cheap pricing away from issuers.
While the headlines about last month correctly focus on the euro market, some of the most encouraging issues were dollar-denominated, specifically successful deals from lower-rated borrowers such as Staples, which we discuss in our Deals of the Month section on page 20. The absence of similar deals in euros confirms the better-established dollar market's place as the arena of choice for weaker issuers.
While the cash bond market is enjoying a revival, derivatives are being assailed from all sides by regulators. House of Representatives Agriculture Committee Chairman Collin Peterson's proposal that CDS trading should be attendant on possession of the underlying bond is an understandable political move against speculation, but the consequences would be disastrous. Dynamically hedged CDOs require the writing of new CDS - without them, holders' mark-to-market losses would get even worse, making Peterson's recommendation inimical to every intervention his government has made to shore up the banks.
In Europe, moves sponsored by Internal Markets Commissioner Charlie McCreevy and French finance minister Christine Lagarde to force the creation of a central clearing house for CDS apparently ignore the various efforts that have been mounted to create one. Liffe and LCH Clearnet have already established theirs and the others are at an advanced stage. The market accepts that one is necessary and, for all its failings, it - not the ECB - is best placed to decide which one should prevail.