Euro Credit Supply: Record low supply in July

Supply in July is a record low at just €2.6bn

Corporate supply amounted to only €2.6bn in July, a record low for monthly supply. The current higher rates and wider spreads environment has pushed all-in funding costs higher. Furthermore, with corporates starting 2022 more cash rich than ever and many corporates having pre-funded over 2020 and 2021 to take advantage of the low yield environment, there is little urgency for corporates to come to market.

Corporate supply is now sitting at €161bn, up from €158bn in June on a YTD basis. This continues to be the lowest YTD figure of the past few years. We forecast supply to be only another €100bn or so, to close the year out at €250-260bn. This will be nearly €100bn lower than 2021. On a YTD basis, the Utilities sector has seen the largest credit supply with €33.7bn while the Healthcare sector has seen the lowest credit supply with €13bn. In terms of maturity, the 6-9yr maturity bucket has seen the most credit supply with €46.6bn.

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 reputational risk would be detrimental to future capital funding.

Reverse Yankee supply has also been limited this year, at just €18.7bn YTD. EUR spreads have underperformed against USD spreads over the past month. Thus, the USD-EUR differential has widened out significantly. This does open the door for some Reverse Yankee supply in the 10yr. 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 dropped substantially to €5.6bn from €19bn last June. This is lowest supply amount seen this year beating June and on par with July’s amount last year. Financial credit supply is now sitting at €171bn YTD, in line with previous years. We forecast financial supply (excluding covered bonds) to reach up to €290bn by the year-end.

Covered bonds have been very substantial this year, with another €11bn in June, pushing the YTD figure up to €128bn. This already well exceeds the full year figures in 2020 and 2021. We expect covered bond supply to be lower in the second half of the year as we forecast supply to reach €150bn by the year-end.