The average forecast for 2022 euro benchmark issuance among 13 analysts surveyed by The CBR is €120bn, around 25% higher than this year’s volume, although €30bn separates the highest and lowest forecasts, reflecting the high degree of uncertainty on inflation and Covid going into the new year.

With the market all but closed for the year, new issuance of euro benchmarks ended 2021 at €95.15bn (and at least €98.975bn including taps*), slightly ahead of 2020 and well above mid-year expectations that fell to as low as €75bn. The ultimate figure was nevertheless well short of the €107bn average forecast of 14 analysts in December 2020, with Natixis’s €90bn-€100bn forecast at the time having come closest to capturing the 2021 total.

2022 euro benchmark supply forecasts

Note: where a range has been forecast, The CBR took the mid-point of the range when calculating the average forecast

HSBC’s euro benchmark covered bond forecast is the most bullish, at €130bn-€140bn, the upper end of which would represent an increase of close to 50% on this year’s volume. Frank Will, global head of SSA and covered bond research, noted it would mark a return towards the pre-crisis levels of 2018 and 2019 (€137.4bn and €139.5bn, respectively).

Published on 16 December, ahead of the announcement of the latest European Central Bank moves later that day, HSBC’s forecast could potentially better reflect than earlier forecasts the uncertainties over inflation, the impact of the new Omicron Covid-19 variant, and the possible central bank response to this. However, Will flagged the uncertainty that is set to persist into 2022 and leave a question mark over the level of covered bond issuance.

Deutsche and DZ analysts who published relatively early forecasts – of €122bn and €125bn, respectively – stood by these in the wake of the ECB meeting.

But with the ECB proving less dovish at last week’s meeting, at least, than some had expected, Crédit Agricole analysts upped their central forecast by some €10bn to around €130bn, the second highest among those surveyed by The CBR.

BayernLB published the second lowest figure, €110bn, on 8 November, with expected announcements on new long term financing operations – albeit with less attractive terms – contributing to the modest forecast. Emanuel Teuber, head of investment research at BayernLB, told The CBR that while the outcome of the ECB meeting could perhaps add some €10bn to next year’s supply, it does not warrant a big correction to the forecast.

“In the end, there might be some factors that would warrant a higher target for new issue volumes, as banks are going to replace some of their TLTRO funding,” he said, “but on the other hand I believe that the credit markets will see some more volatility compared to this year, so issuers will have to deal with more difficult markets, which might result in lower possibilities to issue.”

The lowest forecast among those surveyed by The CBR was from ING, just €105bn, which would be only just over 10% up on 2021. Maureen Schuller, head of financials sector strategy at ING, said the ultimate outcome of the ECB meeting was in line with the scenarios reflected in the bank’s covered bond forecast, which was made more than a fortnight beforehand.

Several factors play into ING’s low forecast, including limited TLTRO refinancing expectations, partly due to the 2022 redemptions being the first two tranches, which are among the smaller ones, and partly because prepayments will in many cases take out excess liquidity and not result in an immediate financing need, while margin-conscious banks that do need the liquidity hold on to TLTRO drawings at minus 50bp until maturity given rising funding costs – Schuller anticipates a greater impact from TLTRO refinancing in 2023.

“The major question still remains how sticky inflation levels ultimately prove to be,” she added. “If the rise in inflation levels we have seen so far proves less temporary and more permanent than anticipated, yield levels are going to rise. Even with banks being conscious regarding their net interest margins, we believe that a part of the banks that are not there yet will still take the opportunity to issue MREL-eligible instruments in 2022 ahead of the final MREL requirements applicable per 1 January 2024 (preferred to the extent they can use that, otherwise bail-in senior) to lock in current still relatively attractive spread and yield levels.”

A rise in underlying yields could also dampen house price and mortgage lending growth, noted Schuller, but also that potentially higher future yield levels could spur issuers, particularly those from markets with fixed rate mortgage loans and long interest reset periods, to continue to target longer maturity covered bonds and lock in margins.

“These are in a nutshell the main reasons for our relatively low covered bond supply expectations into next year,” she said.

*Our final 2021 euro benchmark figure is based on euro benchmarks included in our database. Some of the syndicated taps are already included in the database, too, but some of these, as well as most non-syndicated taps, are not yet included as we are sourcing further details. We are also conscious that we may not be aware of some, particularly non-syndicated, taps, given that these are not necessarily publicised, hence the “at least” €98.975bn figure and delay in entering these in our database. Thank you for your patience and understanding!

Photo: ECB/Flickr