Investors’ appetite for bank debt has defied expectations this year, with them gobbling up European FIG issuance.
Nowhere has that been more obvious than demand for floating rate notes, where the number of transactions is running at about twice the rate of the same period last year: 19 FRNs compared to nine in 2023.
The total volume raised stands at €19.7bn in 2024, about 45% higher than the €13.5bn issued over the equivalent time last year
Meanwhile, it has been a particular type of investor that has swelled the size of FRN order books — asset managers.
Many of these funds have found themselves awash with cash from money market and short credit funds, which in turn has been driven by interest rates being so much higher than they were a couple of years ago.
It has also proven to be a win for many issuers, namely banks that naturally have floating rate liabilities and typically swap their fixed rate bond issues back into a floating rates.
Execution risk for issuers is also reduced, which is a boon when interest rate markets are as volatile as they have been recently.
But issuers should not take asset manager demand for FRNs for granted — particularly in an interest rate environment where central banks are anticipated to cut policy rates, possibly several times, later this year.
Asset managers are a savvy bunch and can be agile when pivoting across asset classes and formats. If spreads or yields start to sink, they may decide its time to batten down the hatches and steer clear of floating rate products.
Issuers would be wise to ride the floating rate wave before it ebbs away.