Articles & Interviews
4 July 2023
New Issue Premium: a Smart Way to Add Yield to Your Bond Portfolio
The 'new issue premium,' also known as NIP, is a reward earned by investors for participating in the primary credit market. It ensures that the primary market can raise sufficient funds to issue new securities and assist in corporate refinancing activities. This premium is measured based on the yield of a comparable bond in the secondary market. An analysis has shown that due to the significant financing needs, the NIP for European Investment Grade surged up to 70 basis points during the COVID-19 period. The observed premiums can be attributed to the volatile environment and low demand for bonds at that time, which was influenced by decreasing interest rates.
The research quantifies this premium strategy by constructing a quant model and identifying explanatory variables that systematically predict short-term outperformance of high-yield bonds after their issuance. By modelling a set of micro-macro features and fine-tuning a Machine Learning model, the researchers succeeded in predicting winners and losers over a 5-day post-issuance period. The systematic strategy captures an average monthly excess return of 0.25% versus the high-yield new issue market, with a historical average monthly precision of identifying winners at 77%.*
The existence of the NIP no longer needs to be proven, and the implementation of that selection model shows that there is potential for excess returns due to a robust selection process. Even if not achieved through Machine Learning, it is likely that some players are able to extract outperformance due to their presence and expertise in the primary market.
Junior Investment Analyst
* Returns are not guaranteed. Investors are advised to seek independent advice from specialist advisors before concluding any transactions based on the information contained in this document, notably in order to ensure the suitability of the investment with their financial and tax situation.
The figures, comments, opinions and/or analyses contained herein reflect the sentiment of RAM with respect to market trends based on its expertise, economic analyses and the information in its possession at the date on which this document was drawn up and may change at any time without notice. They may no longer be accurate or relevant at the time of reading, owing notably to the publication date of the document or to changes on the market.
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RAM therefore recommends that investors obtain the various regulatory descriptions of each financial product before investing, to analyse the risks involved and form their own opinion independently of RAM. Investors are advised to seek independent advice from specialist advisors before concluding any transactions based on the information contained in this document, notably in order to ensure the suitability of the investment with their financial and tax situation.
Past performance and volatility are not a reliable indicator of future performance and volatility and may vary over time, and may be independently affected by exchange rate fluctuations.