Bond issuance in Europe reached €110bn of new supply printed across financials and corporates, indicating that the market is back with a bang after a lacklustre 2022.
This is the tone of a note from Johnathan Owen, who works in portfolio management at TwentyFour. Owen stated that the January figure exceeds every month of 2022 and is almost a fifth of everything issued in that year.
He added: “Financials issuance accounted for around 60% of the January haul with nearly €65bn issued by banks and insurers across the capital stack, a 70% increase on the previous year. The bulk of this supply has been driven by senior issuance, which at around €53bn was almost double the €29bn printed the previous January.”
He continued: “Corporate bond issuance has increased by a more modest 5% year-on-year, though this isn’t particularly surprising. Banks tend to have more regular funding needs, whereas companies can shift their investment and capital needs with the economic cycle and thus are more likely to shy away from today’s higher interest rate environment, especially given the amount of prudent front-loading of issuance we saw through 2020 and 2021.”
The issuance of €110bn, wrote Owen, has been met with an oversized demand of €260bn. He said that financials saw an average oversubscription of 2.3x, while corporate demand was even healthier at 3.4x, probably reflecting the lack of any meaningful increase in supply and limited liquidity in secondary.
Owen suggested that there are a number of reasons behind the surge: January usually being a busy month, European credit funds reporting their highest weakly inflows since June 2020, secondary liquidity being poor, and pension and insurance funds looking to lock in ‘this wave of high coupon, investment grade issuance’.
He added: “However, one important factor that is often overlooked is government bond supply. In Europe net issuance is expect to be more than €500bn this year, a record level which will no longer be propped up by central bank buying. This is an overhang syndicate desks will have been warning issuers about and encouraging them to get funding done early; with cash rates finally offering attractive returns again, credit will need to compete with the glut of risk-free supply in 2023.”
Owen does, however, advise caution.
He stated: “The macro backdrop is still uncertain but we’ll hear more on that front from the central banks this week. In primary we think investors need to stay selective, stick to favoured names and avoid the Fear of Missing Out. Markets have digested this bout of supply well, but as we head into 4Q22 earnings season the pause in the primary onslaught will be a welcome opportunity for secondary markets to take stock of what’s to come.”
