UK long-dated credit ‘on the brink of extinction’ due to pension reforms

Coalition pension reforms have driven long-dated sterling corporate bond issuance to the point of extinction, says J.P. Morgan Asset Management

The government’s pension reforms have driven long-dated sterling corporate bond issuance to the point of extinction, according to J.P. Morgan Asset Management’s Andreas Michalitsianos.

The manager of the JPMAM Sterling Corporate Bond fund said the landscape of the UK corporate bond market has fundamentally changed, with little issuance of long-dated bonds seen last year.

The main driver of this slowdown has been the pension changes, and resulting blow to the annuities market.

“What [the pension reforms] did was take away a natural buyer of long-dated investment grade corporates. The market for annuities was £11bn, and two-thirds of that made its way into the sterling corporate bond market so, in context, that means a significant slowdown,” the manager (pictured) said.

0405-corp-bond-issuance-chart

The trend is likely to be here for the long term, as future demand for annuities is unlikely to return to previous levels, he added.

“Mondelez has been the only 30-year corporate issuer so far this year, and that was £450m of around £7bn issued year-to-date.

“It did not take long for the markets to figure out there is not the demand there once was and, although there will be income drawdown products that replace single annuities, we do not know whether there will be demand for corporate bonds within that.”

Another trend in fixed income markets at the moment, Michalitsianos said, is for companies to issue bonds denominated in euros.

“The big story for corporate issuance is that everyone is issuing in euros. The question for companies is why not issue at ultra-low yields if you are getting revenue and paying production costs in euros, while paying the proceeds of that issuance back into your own country?

“When British American Tobacco issued, not one bond was in sterling, whereas traditionally you would have seen some long-dated sterling.”

This change has been beneficial for UK investors, Michalitsianos said, as sterling bond values have increased.