Report2 September 2022Updated 2 months ago

Euro Credit Supply: Expecting limited supply over the coming months

We expect supply to be rather limited in the coming months relative to previous years, as risk off sentiment is keeping spreads and rates elevated

Executive summary

Corporate supply expected to remain limited over the coming months

Corporate supply amounted to €14.8bn in August. We expect supply to remain limited for the coming months, with spreads and rates both at elevated levels compared to the previous couple of years, and with the risk-off sentiment in the market likely to push spreads wider from here. Furthermore, with corporates starting 2022 more cash rich than ever and many corporates having pre-funded over the course of 2020 and 2021, taking advantage of the low yield environment. Thus, there is little urgency for corporates to come to market.

Corporate supply is now sitting at €175.4bn in August on a YTD basis. This continues to be the lowest YTD figure of recent years. We forecast only another €100bn or so of supply this year, to close the year at €250-260bn. This will be nearly €100bn lower than 2021. On a YTD basis, the Utilities sector still has the largest credit supply at €36.3bn, followed by Industrial & Chemicals at €30bn while the Healthcare sector has seen the lowest credit supply at €13bn. In terms of maturity, the 6-9yr maturity bucket has seen the most credit supply with €49.9bn, and the 0-3yr bucket has seen the least supply with €25.8bn.

Many hybrids were priced at relatively lower costs compared to the significantly higher all-in funding cost currently. Therefore, for some issuers it would make mathematical sense to extend their hybrid bond in order to lock in the lower rates. In particular, the more infrequent hybrid issuers from more higher beta sectors or inflationary sensitive sectors seem to be most prone to this possibility, if and when they do not have significant outstanding curves. Although, any implied reputational risk would be detrimental to future capital funding.

Corporate Reverse Yankee supply is now at €20bn YTD. EUR spreads have underperformed against USD spreads over the past month, thus the USD EUR differential has tightened significantly. This closes the door for some Reverse Yankee supply, particularly in the 5yr area, However, as overall supply is low, we do not expect Reverse Yankee supply to be substantial. 

Covered bond supply is substantial, but set to slow down in the second half

Financial supply has increased considerably from €5.8bn in July to €23.9bn in August. This is higher than last year’s €12.2bn figure. Financial credit supply is now sitting at €194.8bn YTD, close to that of previous years. We forecast financial supply (excluding covered bonds) to reach up to €290bn by the year end.

Covered bonds continue to see very substantial supply this year, with another €15.5bn in August, pushing the YTD figure up to €152.3bn. We expect covered bond supply to be lower in the second half of the year as we forecast supply to reach €170bn by the year end.