Everyone is back into the European bond market pool

New European bond issuance had a hesitant start to 2022, with the first week constrained by the release of hawkish minutes from the Federal Reserve. But the second week more than made up for it: A new record was set with over 144 billion euros ($165 billion) of Europe-originated syndicated bond deals printed so far this year.
This week’s more stable market conditions provided the perfect opportunity for corporate treasurers to get ahead of their funding needs. As has become standard during the pandemic, the biggest share of just over half has been taken by the official sector (governments, supranationals and related agencies known collectively as SSAs). A 30-year deal from Italy got the ball rolling last week and has been swiftly followed by 10-year and longer deals from Spain, Portugal, Ireland and Cyprus — with others soon to come.
The mounting needs of governments have led to them out of the traditional auction process to a greater presence in the syndicated market where investment banks corral investor demand. There, governments can raise much larger amounts, often in longer maturities too. It has been particularly popular for the new wave of ESG-linked debt, which compromised a record 44% of all euro-denominated issuance in November. And official borrowing isn’t likely to diminish: The European Union needs to raise 800 billion euros over the next five years — a third of that amount green-labelled.
Even excluding the SSA sector, overall European-led high-grade issuance is 50% higher than the US market equivalent so far this year, though this gap will no doubt narrow as the dust settles over the Fed. What is most interesting is how many deals have been launched by financial institutions in Europe, and not just in euros.
So far new bank debt comprises a 36% share, with 52 billion euros raised in 72 deals as of January 13. That’s a 40% uplift in size from last year’s pace, albeit some deals will have been held back from 2021 because the rapid spread of the omicron variant in early December brought a premature close to new issue markets. Still, there is room for bank supply to regain more of the overall pie. In the first two active weeks of 2020, just before Covid took hold, financial institutions made up nearly half of total new issues in Europe. With SSAs not backing away, there is going to be a lot more debt for sale. Expect more records to be broken as long as investor interest holds up.
Keeping the market flowing involves several factors. For fixed income investors, smarts come with timing when money is put to work. Bond sales usually provide a carrot of a new issue premium above existing debt yields to win over investors.
For now, higher yields, along with modestly wider spreads, are attracting investors. Meanwhile, issuers flock to raise debt before the interest rate landscape changes when the Fed gets to hiking with a vengeance.
—Bloomberg