Markets

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

The start to 2017 has been a boisterous one for corporate issuance. All systems are go in the U.S., as my colleague Lisa Abramowicz has pointed out. Some 15 deals were announced Monday in Europe alone, on top of the 40 or so issued in the first week of the month. It's a feast of supply.

The flurry makes some sense, as the freight train of three or so Federal Reserve interest-rate hikes is coming this year. That weighs against a softer picture in Europe, where the European Central Bank and Bank of England are still buying up bonds through quantitative easing, and are a long way from raising rates.

While things seem to be going pretty well in America, all is not well across the pond -- spreads over government bonds on a number of deals, particularly in financials, are quoted wider than launch, a sign of indigestion and bad news for issuers to come.

Holiday Indigestion
Spreads are already backing up following a surge of euro-denominated new corporate issuance
Source: Bloomberg

Some of this week's surge in sales is catching up from the two days of public holidays last week, no doubt, but the majority are for financials and include a lot of senior secured bonds, which are some of the safest possible. The start of a corporate supply onslaught normally follows after the financials are largely out of the way -- time to get ahead of your funding needs for the year, especially as rising equity prices are a good omen for corporate credit demand.

This round of funding might be a harder sell. A lot of the inherent risks implied in credit spreads have dissipated as the ECB has become the go-to buyer of investment grade debt. And while it doesn't buy financials or bonds rated below investment grade, the crowding out of its buying in the top-rated market has pushed down spreads for high yield. 

Rollercoaster
Trump's election, Italian referendum, bond rout create a bumpy ride for European corporate bond spreads
Source: Bloomberg

Let's not forget President Mario Draghi and his colleagues have already pushed down government bond yields, so overall it's rather harder for investors to make any money. A buyer’s strike might become a serious risk for companies looking to issue, as it's not quite clear where the incentive is for money managers to sell what they're holding and buy what's on offer when the yield differential isn't that spectacular. 

Companies don't seem to have got the message yet. In sharp contrast to the lull late last year, where new issue premiums were more on the order of 20 to 30 basis points compared to equivalent existing bonds, they've sharply reduced already in Europe. Ford Motor Co.'s FCE Bank was able to get away a 750 million euro ($791.1 million) deal last week with no concession to its existing credit curve. Those are not exciting conditions for investors to rush back in with their new money at the start of the year.

ECB's Buying, and Everyone Wins
Shrinking gap between safest and riskiest debt shows knock-on impact of central bank buying
Source: Bloomberg

The ECB's QE has been hoovering up over 50 billion euros of European corporate supply since its inception. As the central bank refrained from buying over the holiday period, they have had a lot of catching up to do. If they took down a good chunk of Henkel AG's two-year note issued at a negative yield, that leaves some costly pickings indeed for the regular players.

And the sheer surge of supply is going to drain investor enthusiasm as clearly they can be a lot pickier, not least because fund managers simply cannot process the amount of credit due diligence required. That's before syndicate desks succumb to the usual temptation and get a little greedy on pricing.

Add to this competition from a slew of government issues, which were kicked off by a 4 billion euro deal last week from Ireland which was much bigger than expected and is proving hard for the market to absorb. The game is now to spot ahead of time what will be the deal too far.

It's no wonder corporate issuers are readying to take advantage. But without a sweetener, investors may not bother turning up.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Marcus Ashworth in London at mashworth4@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net