Euro Credit Supply: A very slow July

Corporate supply only amounts to €8.8bn, leaving negative net supply    

Primary markets were very quiet in July, with corporate supply amounting to no more than €8.8bn. This is substantially lower than the average €20bn normally pencilled in during July. In fact, this figure is more in line with supply generally seen in August. This is due to the large amount of pre-financing done in the first half of the year. Gross purchases were negative in July as redemptions totalled €12.4bn, leaving -€2.2bn in gross purchases. This is a historically low gross purchases for July. As a result of low supply in July, we may struggle to reach €350bn by the end of the year, however, we still expect it to be a sizeable amount of €320bn-€330bn.

There was no corporate hybrid supply in July, but the YTD total stands at €24bn. We still expect hybrids to remain a popular issue, and still expect hybrid supply to approach the €50bn mark by the end of the year. Corporate Reverse Yankee supply was also zero in July. On a YTD basis, Reverse Yankee supply is sitting at €26bn. USD spreads have widened out notably. This is mainly due to the comparative lack of direct support from the Fed relative to the ECB’s corporate bond purchases under CSPP and PEPP. Furthermore, the tapering talk is coming to the forefront in the US. Widening was rather notable in HY, driven by the Energy sector. The USD EUR spread differential widens in both the 5yr and 10yr areas of the curve. This opens up more cost-saving advantages for US corporates to issue in Euro. If this continues post summer, we will likely see an increase in Reverse Yankee supply.

Financial supply also very quiet as just €4.4bn in July  

Similarly, financial supply was very quiet in July. Supply amounted to just €4.4bn, down considerably from the €15bn July average of the past few years. This is the lowest month for supply since December 2020. Financial redemptions were just €8.3bn in July, however, gross supply remains negative at -€3.8bn.

Covered bond supply pencilled in €4bn in July, up on just €1bn in July 2020. Covered bond supply on a YTD basis is sitting at €53bn. It is still down 30% compared to the €76bn supplied last year on a YTD basis. This year Covered bond supply has by far been impacted the most by the drawing of cheap central bank funds through the TLTRO-III operations. For that reason and considering the meagre €48bn seen this year, we have decided to reduce our year end estimates from €100bn to €80bn.

The same can be said for bank supply, especially for preferred senior, while bail-in senior bond supply is less impacted by the TLTRO-III operations as it serves for the purpose of meeting bail-in buffer requirements. We forecast that bail-in senior supply will likely end the year higher than initially anticipated at €95bn. We still expect €53bn for preferred senior unsecured supply. We also still expect that bank capital supply will amount to €32bn. All in all, we lower our bank supply estimates for the whole year 2021 from €270bn to €260bn.