Fixed income: What’s the issue with the new issue premium?

3 min read 21 May 24

Amid surging demand for investment grade (IG) corporate bonds, the new issue premium typically offered by companies turned negative in the first quarter of 2024. This comes as investors seek to lock in higher yields before potential central bank interest rate cuts and demonstrates the weight of capital seeking to enter the market.

The new issue premia (NIP), the extra spread that investors are paid for buying a company’s new issue relative to its existing bonds, turned negative at points in the first quarter of 2024 amid burgeoning demand for IG corporate bonds – and there have been few signs so far of this appetite abating. For example, the average new issue premium paid by investment grade corporates in euros was -2 bps for a week in February1, meaning that new paper was more expensive for investors to buy than existing deals.

Companies typically offer between 5bps – 15bps in NIP to incentivise investors to participate in the primary market and to ensure their financing needs are met. NIP can even reach as high as 30bps when supply is plentiful, the market is weak or when companies have an urgent funding need.

“We believe new issue premia (NIP) are a key area where active managers can add value versus their passive counterparts.”

For investors to be willing to accept a lower spread in the primary market than is available on the secondary market could be considered irrational, but is an indication of the weight of money coming into bond markets so far in 2024. Paying up in this manner is a surer way for investors to secure a large block of bonds for their portfolios, as they look to lock in high yields in anticipation of interest rate cuts from developed market central banks in the coming months. Today’s market is firmly weighted in favour of issuers over investors.

This is despite new issuance in European IG credit running nearly two thirds higher compared to 2022. Meanwhile, corporate borrowers issued $606 billion worth of dollar bonds in the first quarter of 2024, the highest total since at least 19902. Companies are looking to take advantage of easier financial conditions, and amid fears that inflation could yet prove stickier, making it potentially more expensive to refinance later in the year. Potential volatility around the time of the US elections also creates uncertainty about conditions later in the year.

Despite frenzied new issue activity in recent times, US corporate bond market liquidity (as measured by primary dealer inventory) has not kept pace with the growth of the market. This may prove problematic if the market’s demand for credit were to fall.

We believe NIP are a key area where active managers can add value versus their passive counterparts. Active managers are well placed to participate in many new deals. Furthermore, a rigorous credit research team are able to identify where new issuance offers an attractive premium.

1GlobalCapital, ‘Average IG corporate premiums dip into negative territory’ February 2024.
2Financial Times, 'Companies rush to issue bonds to forestall market volatility ahead of US election', March 2024.

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.

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