2021 euro benchmark supply is widely expected to be even lower than initial forecasts, falling toward €75bn, with one analyst saying reaching last year’s €91bn would be “heroic” given H1 supply and negatives such as TLTROs. But in spite of the lack of supply, a risk of modest widening is seen.

Euro benchmark issuance in the first half was around €46bn, just about half of what was issued in the first six months of 2019, for example. Going into the second half of the year, most analysts have revised their forecasts downward.

DZ analysts had one of the lowest forecasts at the turn of the year, at €90bn, but even they are now expecting a lower full-year total, of €75bn. DZ analyst Jörg Homey noted that usually around 60% to 70% of all new euro benchmarks in a year are issued in the first half.

“If you think this statistical relationship will apply to this year as well, then it should be something shy of €70bn for the whole year,” he told The CBR.

ING analysts cut their forecast for 2021 before the year even began, reducing it from €110bn to €95bn after the European Central Bank announced new TLTRO measures in December, but they now believe that forecast was also too high.

“It would simply be heroic to end the year close to €95bn given the slow first half of the year on the back of the TLTRO operations,” said Maureen Schuller, head of financials research, ING.

She has revised her forecast to €75bn, also looking at the historical balance of supply between the first and second halves of the year, and seeing little reason for issuance to pick up.

Danske Bank analysts are now also expecting around €75bn, having initially forecast €102bn. They noted that should supply be limited to €75bn, it would make issuance in 2021 the lowest since at least 2004, and result in net supply of minus €57bn over the year.

Citing “voracious” uptake of central bank funds, LBBW analysts have cut their forecast to €80bn from €115bn, a figure that was at the upper end of those surveyed by The CBR at the turn of the year.

Primary market issuance in H1 2021

Source: LBBW

Deutsche Bank started the year with another of the most optimistic forecasts, €114bn, but Bernd Volk, head of covered bond research at Deutsche, believes last year’s full year total is the best that could be achieved, with 2021 full year supply likely to be lower.

“I don’t think the second half will bring any categoric change,” he said. “We were too optimistic on banks’ total funding need and also their willingness to use public covered bond issuance.

“All the banks know that the ECB will not change its TLTRO policy in the near future and I would be very surprised to see banks do a lot of pre-funding for next year.”

Analysts at NordLB, who already this year amended their forecast from €105bn at the beginning of the year to €78.5bn, have stuck with their revised figure.

“Looking at the latest allocation in the TLTRO III.8 tender [€110bn, announced on 17 June], we do not see any additional negative impact on primary market supply,” they said. “Nor do we expect more than minor disruption potential for the primary market from the remaining tenders, in part because of the modalities in play.”

Alongside TLTROs, high volumes of retained covered bonds have contributed to the low supply this year, according to Cristina Costa, senior covered bond analyst at SG. She has lowered her forecast to €80bn, from an estimated €100bn-€110bn at the start of 2021. Another reason for her change has been a focus among Canadian issuers on non-euro issuance, notably sterling.

A high level of deposits among banks was another factor cited by analysts in explaining the depressed supply, as was the relatively low cost of senior issuance versus covered bonds.

DZ: Central bank funds and high volume of deposits argue against extensive new covered bond issues in H2 2021

Source: DZ

The historically low issuance as well as ongoing CBPP3 purchases are seen as key contributing factors to keeping spreads near their current levels into year-end.

However, some analysts cited downside risks to spread performance, albeit with only modest widening deemed likely. Homey at DZ, for example, expects a widening from the current 5bp level of the iBoxx covered bond index to 8bp towards the end of the year.

“That is mainly due to growing concern about potential tapering,” he said, “but it’s only 3bp, so it’s really not that much.”

Costa at SG said high supply in the SSA market could put pressure on spreads in that sector, with a knock-on effect on covered bonds, particularly given how tight they are trading versus SSAs. This could result in widening into the high single-digits, she said.

However, some analysts noted that covered bonds are trading cheap versus senior unsecured bank paper, and Volk at Deutsche said this should put a cap on any widening of covered bond spreads.