Euro Credit Supply: Lower corporate supply; higher financial supply in 2022

Substantial corporate supply in week 2, driven by Real Estate

Corporate supply amounted to €36bn in January, to kick start the year. This was mainly pushed by the substantial level of supply coming in week 2, a total of €20bn. This was met with an increase in ECB activity, helping to subdue the widening induced by supply indigestion. The Real Estate sector was very notable in January, pencilling in €13bn in supply. On the back of the large supply in Real Estate last year and again last month, demand is beginning to slip slightly, with NIP needing to be significant at up to 25-30bp, notably higher than other sectors.

We forecast lower supply for this year, at around €290bn on the back of recent pre-funding, high levels of cash on the balance sheet, less need for rating defence in hybrids, robust loan issuance, manageable M&A and only mildly attractive funding opportunities for foreign issuers. Already redemptions were higher in 2021, resulting in a drop in net supply to €122bn, which played into the strong technical picture seen in 2021. Redemptions are higher again in 2022, pencilled in at €223bn. Therefore, we expect net supply to drop by half of 2021’s figure, to around the €67bn mark, a 10-year low.

We expect supply will be concentrated in the belly of the curve in 2022. The long end will become unattractive on the back of rising and steepening rates, and thus issuers will be inclined towards the belly. This may cause some supply indigestion at times, but we ultimately remain constructive and favour the short end to belly of the curve.

Financial supply forecasted to rise and reach up to €290bn in 2022

Financials supply totalled €34bn in January, of which €24bn was bank supply. Covered bonds had a very strong start to the year with supply totalling €29bn, double that of last year. On the back of no further easing of TLTRO conditions, we expect to see financial supply increase in 2022 versus last year. However, we consider that bank bond supply will still continue to be limited by the TLTRO-III programme as the programme offers banks funding until end-2024.

We forecast financial supply to increase up to €290bn this year. The increase is driven particularly by higher issuance in senior unsecured debt. We forecast covered bond supply to hit €110bn in 2022.