Polls apart: cash stampede protects corporate issuers from democratic disruption

Elections across Europe, including a snap vote in France, and November’s US polls were at the forefront of investment grade corporate borrowers’ minds throughout 2024. Borrowers expected so much volatility that most tried to complete their funding by early October, leaving room for opportunistic nibbles at the market if the window was open.

But the corporate bond market did not miss a beat. Indeed, spreads in Europe’s corporate credit market tightened throughout the year, helped by the wall of cash that has poured into the asset class. Up until the start of October, there were only three weeks in which there were net outflows.

This helped smooth over any lingering worries about another once-reliable, now vanished source of demand for corporate bonds. “One of the standouts was we have seen the European Central Bank withdraw from the market, no longer reinvesting through Corporate Sector Purchase Programme, and we were a bit concerned about it,” says Marc Rovers, head of euro credit at LGIM. “But one of the really noticeable things we saw this year was that the lack of buying by the ECB was more than compensated by inflows into the asset class.”

This technical strength — and there are few stronger technicals than investors sitting on piles of cash that they are desperate to put to work — is probably one of the reasons that respondents to GlobalCapital’s survey on the outlook for the corporate bond market are so confident that spreads will move even tighter in 2025.

Of those surveyed, 74% think that spreads will tighten slightly next year, while a more optimistic 16% think spreads could move as much as 20% tighter. In October, the iTraxx Europe Main was trading in the mid 50s, suggesting spreads could tighten to the mid to low 40s if the optimists are correct.

“We are at all time tights in investment grade and high yield,” says Nachu Chockalingam, senior credit portfolio manager at Federated Hermes, “and I don’t see an event that materially takes us wider”.

There is some indication that next year’s issuance might start to mop up the cash pools, with just 21% of respondents expecting volumes to be flat next year compared to 2024 with everyone else thinking they will be higher.

ING analysts predict that there will be €400bn of high grade corporate issuance next year, versus €276bn of redemptions — a net increase of €124bn compared with 2024.

Barclays forecasts a net increase of €170bn next year, although it combines financial and non-financial investment grade corporate issuance in that number.

The UK bank says that at around €578bn across financial and non-financial companies next year’s maturity wall is the “highest volume of redemptions ever seen for the European investment grade market”. This is a record that will not stand for long, with Barclays expecting maturities to increase again to €620bn in 2026.

Perhaps because of this wave of maturities heading the market’s way, 68% of survey respondents think issuance volumes next year will be at least 20% up on 2024. A more conservative 11% of voters think volumes will only rise by a small amount.

The sterling market will be a particularly high contributor to redemption volumes. “Sterling corporate bond redemptions and expected supply means the net supply is negative in a meaningful way over the next few years,” says Jodie Snow, a fixed income syndicate banker at BNP Paribas. “In 2025, redemptions will be £49bn and we are not expecting much more than the £25bn issued that we saw this year. In 2026, £51bn is redeeming and we expect that same level of issuance.

“Investors will be awash with cash,” she adds, “resulting in a strong technical backdrop, supportive for spreads”.

Another running theme for much of 2024 was the strength of the long end for euro borrowers with the appetite to head out to 15 plus years. Highly rated companies like Anheuser-Busch-InBev and Gasnuie attracted strong demand at 20 years, while some issuers went as far as 30 years.

EDP and Merck issued 30 year bonds in euros this year, while Coca-Cola and Medtronic almost reached the same length with 29 year deals.

The thinking for much of the year for corporate borrowers was that this was a rare opportunity to lock in ultra-long funding at record low spreads, while investors got a chance to pick up their favourite names with a bit of extra juice.

But with such high demand for long dated debt — spreads on new issues were often tightened 35bp or more during bookbuilding — curves flattened, denying investors the level of reward for going long that they wanted.

This is reflected in the fact that 70% of survey respondents are certain that long dated issuance will be less of a feature in 2025, with the remaining voters agreeing, although to a lesser degree. No one polled thinks the long-end trade is going to be a notable feature next year.

“If you are investment grade, one of your main objectives is to manage maturities, so you could still see people go to the back of their curves,” says Chockalingam. “But curves are re-steepening, which is a good thing.”

With companies heading longer this year, however, they may look to diversify their long dated issuance next year.

“The sweet spot for sterling tends to be from 15 year tenors to 20 years, in euros it’s five to 10 years,” says Snow. “As corporate issuers have become more comfortable with longer maturities such as 12 to 20 years-plus in euros, they begin to look at what the sterling market can offer.”

The troubled real estate sector made further progress with its rehabilitation in the bond market this year, but problem areas are bubbling up elsewhere.

The UK water sector is an obvious tough spot, with Thames Water teetering on the brink of collapse. Around 64% of respondents also highlighted the auto sector as a potential problem next year. BMW has suffered a major product recall and Stellantis issued a profit warning in September. Other companies are facing the challenge of soaring costs, regulatory problems, lower discretionary spending and competition from China.

Chemicals, utilities and offices have also been named as potential problem sectors.

Meanwhile, investors complain there is not enough spread differential between different rungs on the credit ladder. “There is reduced dispersion between higher and lower quality credit,” says Rovers at LGIM. “We look very closely at issuer profile, we spend a lot of time on credit analysis and increasingly feel that the moves we see mean there is not enough compensation for going down the rating scale.

“You will continue to do your credit work for potentially limited gains, but the downside risk is high if we see a scenario that is not so benign,” he adds. “It could be geopolitical as well. It doesn’t have to come from the macro side.”

But macroeconomics could still present a nasty surprise according to the survey respondents. Inflation looked to have been tamed in the eurozone after falling from an all-time high of 10.6% in 2022 down to 2% in October 2024.

Those surveyed by GlobalCapital were divided on their thoughts on inflation. Half were confident that inflation was mostly under control in Europe, while the other half were more pessimistic, worrying that there was a slight chance that inflation would rise again to levels requiring meaningful monetary policy intervention.

“Reflation risk is a concern, but we are not sure it’s going to move too far from central bank targets,” says Chockalingam. “There might be a small spike in inflation, but we are not going back to high single digit inflation.”