Flows in freefall – rising interest rates and market volatility clobber primary bond markets
The fall in global bond supply has accelerated into the second half of the year. Rising interest rates combined with concerns over economic growth are heaping pressure on primary markets, hiking funding costs and resigning many borrowers to the sidelines. Issuance volumes have slumped around 28% year-on-year (YoY) to USD 5.2trn in the year to date (YTD). The drop has been even starker quarter-on-quarter (QoQ). During 3Q22, issuance fell short of USD 1.3trn, down a hefty 37% on 3Q21.
No region has been immune to the tail-off in new-issue supply, but the pace of decline has been slowest in Asia-Pacific (APAC), where more than USD 1.5trn of bonds have been issued in 2022 YTD. This represents a fall of around 39% YoY. Europe, the Middle East and Africa (EMEA) has seen the sharpest decrease, with supply plunging more than 49% YoY to USD 1.6trn. There have been a little over USD 2trn of new deals issued in the Americas this year, down almost 46% YoY.
Power players’ strong showing
The trend of declining issuance is evident across the top-10 largest sectors (excluding government and financials), although some have proven more resilient than others.
Energy and utility issuers – the most active industry in terms of supply this year – are almost drawing level with the same period last year. Borrowers have sold USD 269bn of bonds this year versus USD 277bn during the first three quarters of 2021. Construction has also remained relatively stable, issuing USD 152bn YTD, which represents a fall of around 11% YoY.
However, it is a very different picture in the real-estate, technology and automotive sectors, where firms have raised USD 158bn, USD 145bn and USD 143bn, respectively. These figures represent YoY declines of 49%, 42% and 33%.
Volatility has weighed particularly heavily on the high-yield (HY) market. YTD global HY issuance stands at USD 186bn, a YoY collapse of more than 75% when compared with 2021. Investment-grade (IG) credits have raised USD 5trn in the bond market this year, representing a YoY drop of 21%.
FIGs forge ahead
Financial institutions have overtaken corporates as the most active borrowers in the bond market. The financial institutions group (FIG) market has seen close to USD 1.7trn of supply YoY, while corporates have raised USD 1.6trn. During the same period last year, corporates provided almost USD 2.4trn of deals, whereas financials issued USD 1.7trn.
Sovereigns, supranationals and agencies (SSA) account for USD 1.2trn of this year’s deal flow, while asset-/mortgage-backed bonds (ABS/MBS) have added USD 750bn.
ESG bond supply has started to fall this year, although less than the overall decline in primary issuance. YTD global supply of green, sustainable and social bonds is down almost 21% YoY to USD 553bn from USD 697bn in 2021. Despite this drop, volumes are still well north of 2020, when issuance of USD 360bn emerged during the first three quarters.
SSAs remain the most active issuers of ESG debt in the bond market, having raised over USD 219bn this year. During 3Q22, SSAs accounted for more than 46% of overall ESG issuance. Corporate and FIG credits each brought around 26-27% of third-quarter deals, with the remainder made up of asset-/mortgage-back securities.