Early forecasts for 2022 euro benchmark supply suggest issuance could increase as much as 40% from the low seen this year, albeit with net supply remaining negative, although the extent of any rebound depends heavily on ECB TLTRO pronouncements in December, according to analysts.

DZ analysts have forecast a new issue volume of €122bn in euro benchmarks for the coming year. While they note this implies negative net supply for a third consecutive year, of some €15bn, this would represent a significant improvement on year-to-date 2021 net supply of minus €44bn, and an increase on YTD 2021 gross supply of around €88bn and full year 2020 gross supply of €94bn.

“The main reason for our forecast increase in the volume of new issues next year is the expected decline in the attractiveness of refinancing facilities via the ECB,” they said, “as a result of which covered bonds, the cheapest capital market refinancing instrument, will receive more attention from Eurozone issuers.”

The ECB purchase programmes will also continue to provide a friendly environment for new issues, added the DZ analysts, even if the format of QE is expected to evolve in 2022.

Bernd Volk, head of covered bond research at Deutsche Bank, echoed this, noting that even based on an unrealistic assumption of zero net ECB covered bond purchases in 2022, the central bank would absorb one-third of gross issuance available to investors.

He has forecast supply of €125bn for 2022, highlighting that funding plans reported to the European Banking Authority (EBA) suggest a 46% increase in total issuance of covered bonds by EU banks in 2022 relative to 2021.

“Broadly in line with this, we expect issuance of euro benchmark covered bonds to increase to over €120bn in 2022,” he said.

Full year issuance of €125bn in 2022 would represent a 43% increase on 2021 YTD date supply, Volk noted.

“A key risk regarding the strong increase of new issuance is an extension of attractive TLTRO funding, leading to higher use of retained covered bonds than planned,” he added.

Indeed, the importance of what the ECB announces after its December governing council meeting on 16 December was underlined by Crédit Agricole head of covered bond research Florian Eichert last week.

“The TLTRO III decisions in December are still the single biggest driver for 2022 covered bond issuance,” he said. “Effectively, we might have to publish two covered bond issuance forecasts, a dovish and a hawkish one.”

He nevertheless gave an “early guess” of a €15bn-€20bn increase to €110bn-€115bn, expecting 2022 to be a “transitional” year before supply becomes net positive in 2023.

“The hawkish scenario with unattractive TLTRO III terms in 2022 could in turn see issuance really surge,” added Eichert. “We might not quite move into net positive territory, but the difference to our base case could easily be another €20bn-€25bn of issuance and a much more aggressive and volatile feel to Q1.”

DZ forecast 2022: €122bn new issue volume for euro benchmarks

Note: data for 2021 up to and including 2 November; shaded columns = DZ forecast; Source: DZ Bank Research

Also factored into DZ’s forecast is an assumption of a general economic recovery and continued “lively” new mortgage business that should have a positive impact on primary market activity.

“On the other hand,” they added, “we see the high and still growing deposit base of the institutions and a comparatively low swap spread difference between unsecured bank bonds and covered bonds as negative factors for the volume of new issues.”

Meanwhile, they expect comparatively little activity from the periphery.

“For southern European issuers, the less attractive refinancing possibilities we expect from the ECB should still be favourable enough to continue issuing comparatively few covered bonds,” said the DZ analysts.

However, they expect major Australian and Canadian banks to remain keen on issuing euro covered bonds, subject to cross-currency developments.