Analysis-European debt sales break January record in a tricky year
By Yoruk Bahceli and Chiara Elisei
(Reuters) – European borrowers sold a record 280 billion euros ($304 billion) of debt in January, in a jump outpacing U.S. peers, to take advantage of tumbling borrowing costs and better-than-expected economic conditions.
It is an encouraging sign for governments and corporates having to navigate higher interest rates, and for countries needing to borrow more to back energy subsidies amid the spectre of central banks offloading massive bond holdings. But bankers that sell the debt remain cautious.
January’s figures follow a year that saw the biggest jump in government borrowing costs in decades – from the United States to Asia and Europe – as inflation soared.
“Everything that we’ve seen so far indicates 2023 is not going to be as difficult as people feared it would be,” said Philip Brown, managing director, sovereign capital markets at Citi.
Borrowers raised a record 278 billion euros from euro and sterling syndicated debt sales in January, up 10% from the same month last year, data from Refinitiv to Monday shows.
In contrast, bond sales in the United States – the world’s largest debt market – were roughly unchanged at $408 billion in January versus a year ago, the data shows.
Global debt sales overall were down over 10% from January 2022 at $992 billion, which excludes government auctions.
Europe stood out as borrowers made the most of improved sentiment. Falling energy prices have pushed euro area inflation down and business activity is holding up, raising hopes that recession may be avoided.
“Overall versus last year there is more appetite from both global and European investors to invest in European businesses,” said Jonathan Owen, portfolio manager at TwentyFour Asset Management. He noted that U.S. debt sales had fared stronger last year than in Europe.
Bankers said brightening sentiment and sharply lower borrowing costs helped some European borrowers accelerate funding plans.
Germany’s 10-year bond yield has fallen 25 basis points in January, one of the biggest drops at the start of the year on record.
“We weren’t necessarily making plans to issue in the very first week of January, absolutely not,” said Rui Amaral, an official at Portugal’s debt agency, which sold a 15-year bond on Jan. 5 directly to end-investors via banks.
“We were quick to act and to take advantage of that strong sentiment in the market.”
Much of the surge in European debt sales came from financial institutions, which raised 71 billion euros in January, up 50% from January 2022, while they fell 18% in the United States, according to Refinitiv.
Matthias Reschke, head of European investment-grade finance at JPMorgan, said high-grade debt sales had turned out materially higher than the bank expected.
“At the moment we’re also seeing higher issue volumes in the euro market than in the dollar market, and that has never happened before,” Reschke said.
While European corporate debt sales fell year-on-year, analysts said investor demand for riskier deals signalled confidence returning.
In the second half of January, sales of hybrid bonds combining debt and equity features exceeded volumes of the previous six months, TwentyFour’s Owen noted.
Signalling strong demand, Spain’s Telefonica sold a hybrid bond that pays a coupon nearly 1 percentage point lower than a November issue. Investors also digested increasingly lower-rated deals in the junk bond market.
“The question going forward is how much room is left in terms of further performance … and therefore investor demand might become more selective,” said Paula Weisshuber, head of EMEA corporate debt capital markets at BofA.
A still uncertain outlook means challenges ahead.
Lee Cumbes, head of debt capital markets for EMEA at Barclays, said one factor driving markets was a view that inflation was now on an “uninterrupted” downward trend.
“That’s yet to be fully proven,” he noted.
Any signs that inflation is proving sticky could put renewed upward pressure on borrowing costs.
Investors will have to absorb some 400 billion euros of additional debt this year – twice the previous record, according to BofA – given high funding needs and the European Central Bank shrinking its balance sheet from March. It will initially roll off 15 billion euros a month, but the pace could pick up after June.
“It’s been an impressive start, way better than expected. Can we now relax and say there’s great certainty for the months ahead?” Barclays’ Cumbes asked.
“No, I think that’s a step too far.”
($1 = 0.9217 euros)
(Reporting by Yoruk Bahceli and Chiara Elisei; Additional reporting by Matt Tracy in New York; Editing by Dhara Ranasinghe and Mark Potter)