Euro Credit Supply: Decent supply in May despite volatility

Supply in May in line with previous years, but NIP remains high

Corporate supply totalled €32bn in May, in line with the usual €30-35bn for the month. This is a notable increase on the small €9bn supplied in April. This decent supply in May comes despite the changing funding environment. Rates continue to rise, and spreads are currently sitting at the high end of the trading range. Furthermore, primary markets will be under the most pressure as CSPP ends. Already, issuers bringing a bond to the market need to pay a significant new issue premium (NIP), and the ECB are reducing their orders down from 30% to 20%. In fact, due to the recent rise in rates and widening of spreads, many issuers were forced to actually pull their deals and not come to the market as volatility peaked earlier in the month.

Furthermore, new issues have not seen any performance after issuance, and in general, the rule of thumb is that the secondary curve widens out to meet the new issue, as opposed to the new issue tightening down to the secondary curve. This is a clear indication of a bear market. As a result, we would be cautious towards secondary market exposure to corporates that are potentially bringing new bonds to the market. We do see opportunity in new issues that are offering decent NIP, and in the widened out secondary curve.

Supply on a YTD basis is now sitting at €141bn, running behind the previous three years. The majority of supply this year has been concentrated in the belly of the curve, namely in the 6-9yr area, which has pencilled in €40bn. The Utility sector has been most active with supply of €12bn last month. Utility supply is now running ahead of last year on a YTD basis, pencilled in at €29bn, versus €24bn last year. Corporate hybrids supply remains low with no additional bonds issued in May. Thus, hybrid supply remains at €8bn for 2022 thus far.

Substantial financial supply as Bank senior and covered bonds supply increase

Financial supply in May amounted to €31bn, up on the previous years. On a year-to- date basis, financial supply (excluding covered bonds) are now pencilled in at €144bn, running ahead of the past five years. The increase in supply has been seen in Bank senior supply, now sitting at €98bn YTD, up on €80bn last year YTD. Financial supply has been shorter on the curve compared to corporates, concentrated around the 3-6yr area of the curve. In addition, covered bonds remain an issuer favourite, with €23bn issued in May, up on €8bn supplied in May last year. Covered bond supply is now sitting a €115bn YTD, already above the full year amounts seen in 2020 and 2021.