Demand for Europe’s debt sales has topped half a trillion euros already this year as investors seek to put money to work in bonds offering some of the highest yields in years.
(Bloomberg) — Demand for Europe’s debt sales has topped half a trillion euros already this year as investors seek to put money to work in bonds offering some of the highest yields in years.
Investors have bid €530 billion ($570 billion) — more than three times the €168 billion of issuance in Europe’s syndicated primary market this month through Wednesday, according to data compiled by Bloomberg. The tally includes all publicly-syndicated company and government bond offerings, with demand running well above the average for the prior five years to the same point.
“Fixed income is finally back for investors and investment-grade is in the sweet spot,” said Henrietta Pacquement, head of the global fixed income team at Allspring Global Investments. “There’s a fair amount of appetite for investment-grade credit, as well as cash that needs to get invested.”
Debt from borrowers like German utility E.On SE and Italy’s Enel SpA is in demand amid a stabilization in global markets following a torrid 2022 that saw the worst annual returns on record for euro high-grade credit. Investors can now get an average yield of more than 4% when they buy euro-denominated debt of blue-chip firms — almost seven times the yield offered a year ago and close to the highest payout in more than a decade, based on Bloomberg indexes.
It’s also helping that portfolio managers have a big pool of cash to chase these lofty yields. European high-grade funds have been drawing investor inflows for 11 consecutive weeks, based on EPFR Global data cited by Bank of America Corp. strategists.
And European markets in general have come back into favor with investors at the start of 2023, after a milder-than-expected winter and some better inflation data in the region soothed fears of a painful recession.
To be sure, the bright spots at the start of the year don’t eliminate the risk of an economic slowdown at a time when credit investors can no longer rely on central banks to support them.
“In a portfolio where you can invest anywhere, it makes sense for investors to take advantage of higher yields in high grade without taking too much credit risk,” said Thomas Leys, a London-based investment director at abrdn plc. “Core inflation is still rising, geopolitical risks are still high, the consumer outlook is still weak and the risk of recession remains elevated — all while the ECB is no longer buying a large chunk of every deal.”
However, there’s mounting evidence that traditional investors are already starting to take the ECB’s place. Investment-grade funds drew the lion’s share of flows to fixed income ETFs in the fourth quarter of 2022, according to Paul Syms, head of EMEA ETF fixed income product management at Invesco.
“There was some caution last year in terms of taking on credit risk but as we come into the new year, there is a re-evaluation of yields and spreads that is leading investors to start looking for pockets of value,” said Syms, who believes 2023 “could be the year for credit.”
To take part in Bloomberg Intelligence’s European high yield investor survey for the first quarter, click here.
Elsewhere in credit markets:
EMEA
The deluge of primary market issuance continued on Wednesday, with tire maker Pirelli & C. SpA, Commerzbank AG and the World Bank among 24 borrowers raising nearly €23 billion of debt.
- The deals lift weekly issuance from the region beyond €90 billion, the highest in a year and already the second-busiest week on record, data compiled by Bloomberg show
- Demand has piled up for the new bonds of UK utilities Thames Water and National Grid, showing just how hot the bond market is at the moment even for names that made the wrong kind of headlines in 2022
- Despite the deal rush, non-financial borrowers remain largely absent, with just a handful of deals pricing so far this month. Issuance of non-financial debt in euros and sterling “may not increase much in 2023” after a 34% plunge last year, given limited refinancing requirements, according to Bloomberg Intelligence’s Aidan Cheslin
Asia
Asia Pacific borrowers are taking advantage of a drop in borrowing costs to sell more than $35 billion worth of bonds so far this year, a record for the period, according to data compiled by Bloomberg.
- The Philippine government had one of its biggest dollar bond deals ever at the start of this year with a $3 billion offering, but for corporate borrowers in Southeast Asia, local-currency debt is still the way to go. Even as borrowers across Asia Pacific raised more than $25 billion from the dollar bond primary market in the first week of 2023, Southeast Asian companies are staying on the sidelines for now
- Indian billionaire Kumar Mangalam Birla’s flagship metals company is returning to the bond market after a decade-long hiatus, looking to raise funds to meet regulatory requirements
Americas
Banks dominated the US high-grade primary market on Tuesday, with offerings from Spain’s CaixaBank SA, Deutsche Bank AG and Macquarie Group Ltd. active in a six-deal $9.65 billion primary calendar. It’s pushed the month’s sales to beyond $90 billion in just five active sessions — a 26% gain year-on-year.
- Saudi Arabia raised $10 billion through its first Eurobond sale of 2023 on Tuesday, amassing more than $35 billion of investor bids for the deal
- The region’s high-yield market saw its third deal of the year, as energy service provider Venture Global priced $1 billion of seven-year notes to yield 6.25%
- Meanwhile, shrinking profit margins as rising rates and high inflation eat in to firms’ bottom line is signaling more corporate credit downgrades and defaults this year
- For deal updates, click here for the New Issue Monitor
- For more, click here for the Credit Daybook Americas
–With assistance from Priscila Azevedo Rocha and Paul Cohen.
(Updates with final orders and issuance volume in second paragraph)
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