Borrowers have started to return to the European primary bond market, looking to secure deals while markets are calm. Seven issuers are set to raise a total of €7 billion ($7.4 billion) of new debt on Monday, including vehicle manufacturer Volvo AB, grid operator Amprion GmbH, and Commerzbank AG, according to data compiled by Bloomberg. Mandates for deals from the Republic of Finland, the World Bank and a covered bond from Berlin Hyp AG signal that issuance will keep on coming.
It puts issuance on the way to meet the expectations of nearly 40% of market participants surveyed by Bloomberg News that forecast issuance to reach between €15 billion and €20 billion this week. That compares to just €3.5 billion of new bonds sold in Europe over the past two weeks combined, the data shows.
Post-Summer Issuance Wave
“The market is in a good position for the post-summer wave of issuance,” said Marc Lewell, head of EMEA and APAC syndicate at JPMorgan Chase & Co. “The recent bout of volatility has highlighted a fear factor for issuers and reminded them to take advantage of issuance windows when they come.”
The fear factor is not unfounded. A gauge of investment-grade credit risk widened at the start of August to the highest level this year after weak US jobs data triggered a market selloff, reminding investors there is still room for negative surprises.
August Issuance Surge
Bond issuance tends to pick up substantially in the last week of August, with more than €30 billion of bond sales both in 2022 and 2023, the data shows. This trend is driven by several factors:
- Investor Demand: Investors will be clamoring for deals to put the cash accumulated over previous weeks to work and lock in higher yields before further possible central bank rate cuts.
- Fear of Missing Out (FOMO): As Lewell puts it, “But fear of missing out is a driver and many have wanted to get on the credit train before it is gone.” Investors don't want to miss out on potential gains, especially after seeing a period of relatively low returns.
While last week saw outflows from investment-grade funds mainly in the mid-term and long-term segments, that followed six weeks of inflows, according to a Bank of America Corp. report on Friday using EPFR data.
What Lies Ahead for the Market?
The current market conditions seem favorable for issuers, with investors eager to deploy their capital and secure yields. However, market sentiment can change quickly, and any unexpected developments could impact issuance activity. The coming weeks will be crucial to see if the anticipated surge in bond issuance materializes and how the market reacts to it.
Investors will be keenly watching for signs of market volatility, particularly in the wake of the recent selloff triggered by weak US jobs data. The European Central Bank's (ECB) next policy meeting on September 12 will also be a key event for investors, as they will be looking for guidance on the central bank's future course on interest rates.
Issuers Capitalize on Calm Markets
This flurry of issuance comes as a contrast to the relatively quiet market activity in July, which was impacted by the summer holidays and a period of market volatility. Issuers are seeking to take advantage of the current calm market conditions and secure deals before any potential shifts in investor sentiment.
However, the market is not without its challenges. With the possibility of further interest rate cuts on the horizon, issuers are also facing the prospect of lower yields. This could make it more difficult to attract investors and drive demand for new debt.
The upcoming weeks will be a crucial test for the European bond market. If the current momentum in issuance continues, it could set the stage for a strong finish to the year. However, any unexpected volatility or changes in market sentiment could put a damper on activity and create uncertainty for both borrowers and investors.
