5 April 2023

US Dollar Credit Supply: Market turmoil results in low supply

Market turmoil in March resulted in primary markets to close and supply to slow. With the AT1 market in limbo and the concerns and uncertainties around regional banks, it has left financials supply particularly low and is now running behind previous years

Executive summary

There could be more attractive reverse yankee opportunities

Corporate supply of US$69bn in March is down 46% compared to March last year. Net supply was flat at just US$1bn, after redemptions of US$68bn. On a YTD basis, supply is still higher than 2022 YTD and comparable with 2021 YTD, now sitting at US$245bn, after a pretty heavy month of supply in February.  

Utilities and Consumers are among the sectors with a significant increase in issues compared to the previous year. There was twice the amount issued in Consumers YTD, US$30bn compared to the previous year’s US$15bn. Utilities saw an increase of 80% from US$30bn in the first quarter of 2022, to US$54bn at the same time in 2023. 

The equation may be changing for reverse yankee supply, with more attractive swapping conditions for US issuers resulting from USD credit underperformance versus EUR credit. The USD EUR spread differential has jumped wider in the past few weeks. However, the cross-currency basis swap has widened slightly in the initial turmoil but has since narrowed. There are now some attractive funding opportunities for reverse yankee issuers. 

AT1 market limbo and concerns on regional banks results in low financial supply

Financials supply is significantly lower YTD compared to last year. With March supply only at US$26bn, supply in 2023 YTD is now at US$114bn compared to US$197bn last year. The low supply seen in March, US$26bn compared to US$77bn seen last March, was due to the current market turmoil and uncertainty in the credit markets leaving primary markets closed for much of the month.

Supply of subordinated bonds decreased by 85% compared to last month, down from US$8.4bn in February to US$1.3bn in March. The decision by Swiss authorities to wipe out the Credit Suisse AT1 bonds has resulted in large uncertainty in the Bank capital space and has left the AT1 market in limbo. In addition, another drag on bank risk comes from the US regional banks. Uncertainty prevailed, not least because of mixed messages from US Treasury Secretary Janet Yellen, which added confusion over whether or not support is offered to depositors.

Read more on the AT1 market in limbo and our concerns on regional banks in our report Market turmoil leaves credit in limbo, and as explained in our podcast Listen: Constructive on credit.

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