Record supply and reverse Yankee trends in the European IG market
The euro investment grade (IG) market has witnessed a remarkable surge in supply. It set a new monthly record of €97bn settled in May, slightly surpassing the previous high of €96bn from January 2023, based on available data up to 2010. Notably, the euro high yield market also saw elevated supply, with monthly issuance totalling €18.7bn, landing just €2bn shy of the all-time record set in June 2021. While May’s supply exceeded expectations, the digestion of this volume was surprisingly strong, with robust demand reflected in book oversubscriptions throughout the month. We note an underperformance of the euro market versus its US counterpart, as spreads widened to 10 basis points (bps) from 3bps on 23 April, which is when supply started to accelerate.
A large contributor to the record supply seen in the euro market has been the reverse Yankee issuance, US-based companies issuing bonds denominated in EUR in the European market. The year-to-date reverse Yankee supply has seen US issuers capturing their greatest share of new issues since 2019. The share of year-to-date reverse Yankee supply stands at 24%, marking its highest share of new euro corporate supply since 2019, when it was 27%. This is notably above the five-year average of 15%, indicating a strategic shift by US companies to leverage favourable conditions in the euro market.
US companies are increasingly issuing in EUR to capitalise on lower coupon rates, diversify their investor base, and target specific tenors to smooth redemption profiles. This strategic issuance allows companies to optimise their financial structures and manage liabilities more effectively.
The proceeds of these bonds are largely retained as EUR liabilities on balance sheets, serving as a net investment hedge and allowing companies to benefit from the coupon differential. Principals are typically hedged back to USD unless the cash is used for acquiring euro assets or operations within Europe, which is less common. Some sectors, such as automotive, telecommunications and banks tend to fully swap back, creating synthetic USD liabilities.
Looking ahead, the euro supply landscape is poised for a stepdown in June, with average supply historically at €29.5bn. However, current sell side estimates suggest a range of €30bn to €40bn, driven by front-loading ahead of tariff extension deadlines. Demand for new issues remains robust, with book oversubscriptions indicating continued investor appetite, and net issuance is expected to remain flat through June.