Global bond issuance to rise by 16% in 2020 -S&P

After heady second- and third-quarter issuance volumes, S & P Global Ratings has estimated that the pace of global bond issuance to slow through the end of the year, but the full-year total will increase by about 16 per cent on the value in 2019.

In its latest analysis on credit trend, S & P Global Ratings noted that uncertainty has heightened on many fronts including the timeline for a COVID-19 vaccine, the future of central bank actions, the United States general election and outcome, possible resumptions of volatility tied to trade talks and the ongoing Brexit process.

According to the report, these factors, combined with historically robust issuance in 2020, lead to a projection that overall bond issuance will decline by about three per cent in 2021, though with a wide range of possibilities.

The report, however, noted that despite a likely decline in 2021, the pieces are in place for debt to remain robust in the years ahead.

The report explained that the recent increase in issuance might be due to significant liquidity support central banks have provided, which has enabled many companies to take prudent actions to shore up cash amid high uncertainty and the lack of an effective and widespread vaccine for COVID-19.

“Despite a likely drop-off in issuance in 2021, the stage is set for increased debt issuance in the years ahead.  Benchmark government yields—particularly in developed countries—are either close to zero, or in negative territory. This means that even if spreads remain at their current levels, they mask the lower cost of debt that prevails for most issuers. Core European countries have also had their government bond yields at or below zero for several years, potentially showing that lower rates may stay in place for a protracted period, making debt issuance attractive,” the report stated.

According to analysts, more telling, forward-looking inflation expectations indicate that central banks are unlikely to raise policy rates any time soon with five-year inflation expectations in Europe and the US being below the implicit 2.0 per cent target for the better part of the last five years. Additionally, after recent statements by Federal Reserve Chair Jerome Powell, this 2.0 per cent target may be raised in the US, widening the gap further.

“Nonetheless, the road ahead has many stressors and possible unknowns.  In the near term, the US general election could produce a close result, and with many mailing in their votes, a final result may not be known right away. There is also a high likelihood that any close result may be met with legal challenges, which may take some time to resolve, likely causing a bout of market volatility, which could keep borrowers and lenders away from debt markets for a time. Further, it’s possible that there will be no fiscal stimulus until after the election, despite the growing need for it,” S & P Global Ratings stated.

The global rating agency pointed out that globally, the release and widespread distribution of a COVID-19 vaccine are still some time away, and with winter approaching in the northern hemisphere, the odds of future waves of infection will rise. Trade tensions between the US and China are likely to come to the fore again, as well as the Brexit process and deadline.

Because of these factors and their unknown timelines and possible interactions, S & P Global Ratings widened the usual ranges around its forecasts for issuance next year.

“We expect global bond issuance to finish 2020 up 16 per cent relative to 2019.  This would be one of the largest annual increases in bond issuance ever, and has largely been fueled by exceptional growth in corporate nonfinancials from the US and, to some extent, in Europe. International public finance has also had profound growth, led by China, but with most developed economies seeing much higher growth rates as well. With such a high growth rate, and one largely attributable to aggressive fiscal and monetary actions, it is unlikely bond issuance will expand in 2021,” S & P Global Ratings stated.

The rating agency expected global bond issuance to contract roughly by three per cent in 2021 noting that sluggish economic growth across most regions, combined with difficult comparisons with this year, alongside a very uncertain backdrop in 2021 will likely return bond issuance to its pre-2020 long-term growth rate of roughly five per cent, which will put 2021’s total slightly above 2019 in the base case.