FIG VIEWPOINT: Bumper year ends with a flourish as thoughts turn to 2023

While 2021 offered relative stability and issuers almost continual access to funding, 2022 provided more challenging conditions where war in Ukraine, aggressive and synchronised central bank tightening, not to mention China's zero Covid policies, were key drivers of higher volatility.

With that came a significant volume of “no-go" days in Europe's single currency primary market (a total of 50 across all asset classes in the first 11 months of 2022), giving those days when the window was open an altogether more frantic feel.

Despite that, it was a bumper year for bank supply in the single currency with non-covered issuance rising to EUR218.91bn in 2022, easily topping 2021's EUR201.35bn, and representing the highest annual tally since 2009.

Also prospering in the more volatile environment, the lower beta covered market has seen its busiest year ever.

Rising supply from banks came in contrast to a 25% decline in supply from high grade corporates and also a 20% slowdown in supply from SSA borrowers.

Altogether, that meant overall EUR supply across the asset classes slowed for a second year running to EUR1.22tn from EUR1.39tn in 2021 and the record breaking EUR1.48tn in 2020.

Rapid repricing catches many off guard

With the Fed having pivoted to a more hawkish stance at its final meeting of 2021, few doubted that policy rates would rise substantially in 2022 but the speed and magnitude of the repricing caught many by surprise. That was highly evident in the more policy sensitive short end of the UST curve where the 2yr yield rose as high as 4.80% in Q4 having started the year below 0.8%.

For those accustomed to the more restrained pace of hikes seen in prior Fed cycles, that produced a challenging environment for fixed income markets to say the least.

In Europe, yields rose by less, but combined with the significant widening in spreads, it was still enough to produce the most negative annual total returns of the euro-era for credit investors.

Equity markets were far from immune to the repricing in rates although losses were heavily pared in Q4 as markets started to sense that the moment of peak hawkishness was approaching.

Primary market shows resilience

War came early in the year to Europe as Russia invaded Ukraine on 24th February, exacerbating inflationary pressures, bringing extreme volatility to global markets and temporarily shuttering the primary market.

However, in a little over two weeks following the invasion, banks were back in size, with March seeing EUR24.11bn of non-covered supply crammed into the latter half of the month, not far short of January's jumbo EUR27.85bn.

Resilience in Europe's primary markets (and its ability to quickly reprice and move on) is nothing new of course.

That was something also seen back in Q1 2020 when rapidly accelerating Covid cases outside China, and the ensuing tailspin in global risk assets, closed the European primary market for only a few short weeks.

Also highlighting the degree to which buyers were prepared to re-engage this year was the supply flourish seen in November as investors rushed to take advantage of historically attractive spreads to follow a very challenging period from August through to late October.

That resulted in a huge EUR38.325bn coming to market, to mark second busiest month ever for non-covered bank supply, just behind the EUR39.47bn raised in January 2020.

While issuers flooded the market with paper in November, the abundance of investor cash chasing down the fresh supply meant that average cover ratios actually nudged higher. That dynamic handed issuers greater pricing power too, facilitating the lowest monthly average NIC since May.