Euro Credit Supply: Regular slow August

Corporate supply only amounts to €15bn, of which €3bn Reverse Yankee 

Primary markets were quiet in August as per the norm; however, supply was still at a notable amount and it is up on the substantially low amount seen in July. Corporate supply amounted to €15bn in August, most of which came towards the end of the month. This is very much in line with the usual quietness seen in August of previous years. Net supply was positive in August, as redemptions totalled just €10bn, leaving €5bn in net supply. On a YTD basis, supply is now sitting at €223bn. 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 at least another €100bn. Thus, we see supply landing at around €320bn-€330bn.

Corporate hybrid supply pencilled in €3bn in August, and now the YTD total stands at €27bn. We still expect hybrids to remain a popular issue in the coming months. Corporate Reverse Yankee supply was slow in August at just €2.7bn. On a YTD basis, Reverse Yankee supply is sitting at €29bn. USD spreads have widened out notably over the summer. 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. However, EUR spreads have underperformed slightly over the past two weeks, with some widening to the tune of around 5bp. The USD EUR spread differential has been widening overall, apart from the slight recent tightening on the back of EUR underperformance. We expect a continuation of USD underperformance relative to EUR over the coming months. This opens up more cost-saving advantages for US corporates to issue in Euro. Therefore, we will likely see an increase in Reverse Yankee supply.

Financial supply remains lower due to TLTRO drawings 

Financial supply amounted to €11.5bn in August, marginally lower than the average €14bn seen in August in previous years. This is however, up on last year’s €8.7bn. The past two years has seen significantly lower financial supply as the ECB offers very favourable financing conditions via targeted longer-term refinancing operations (TLTRO). This is further illustrated in the YTD figures, with this year’s supply sitting at €171bn, which is marginally lower than last year’s €179bn YTD, both of which are lower than the average €185bn seen by this time in previous years.

Covered bond supply on a YTD basis is sitting at €56bn, down from €77bn supplied last year YTD. 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, we have decided to reduce our year-end estimates from €100bn to €80bn.