All-in funding costs have continued to rise over the past weeks, with swap rates and credit spreads under pressure to new wides. As spreads are pricing in a recession, funding levels will remain high, thus we can expect to see very little supply for the next two summer months.

Very low supply in June as spread widening and yields rising keep primary bare

Corporate supply amounted to no more than €16bn in June, significantly lower than June of previous years. All-in funding costs have continued to rise over recent weeks, with swap rates and credit spreads under pressure to new wides. As spreads are pricing in a recession, funding levels will remain high and we can expect to see very little supply for the next two summer months. Corporates start 2022 more cash-rich than ever, and 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 at €158bn on a YTD basis. This is the lowest YTD figure of recent 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.

Similarly, corporate hybrid supply has been particularly low, at just €8bn thus far this year. With higher rates and wider spreads, the all-in cost of debt has increased substantially. Many hybrids were priced at relatively lower costs, and therefore some issuers will be better off extending their hybrid bond, in order to lock in the lower rates. In particular, the more infrequent hybrid issuers from higher beta sectors or inflation-sensitive sectors seem to be most open to this possibility, if and when they do not have significant outstanding curves (reputational risk would be detrimental to future capital funding).

Reverse Yankee supply has also been limited this year, at just €17bn YTD. The cross-currency basis swap has widened out significantly this year, particularly around the 5yr area. In addition, USD spreads have been outperforming EUR spreads over recent months (apart from some recent USD underperformance in the 10yr area). As a result, it is less attractive for US corporates to issue in EUR and swap back to USD.    

Covered bond supply is substantial, but set to slow

Financial supply was also rather low in June, penciled in at just €19bn. This is te lowest supply amount seen in June over the past four years. This is also the lowest supply month thus far this year. Financial supply is now at €162bn YTD, still in line with previous years. We forecast financial supply (excluding covered bonds) to reach €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 and already well exceeding 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 year end.     

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