Issuance is Likely to Decline in 2017 Despite Increases in Developed Markets' Private Sectors

S&P Global Ratings
Written By: Diane Vazza, Andrew South, Sudeep Kesh, Nick Kraemer, Lawrence Witte and Xu Han
S&P Global Ratings
Written By: Diane Vazza, Andrew South, Sudeep Kesh, Nick Kraemer, Lawrence Witte and Xu Han

After a surge in rated corporate bond issuance in the first quarter of 2017, both rated and unrated issuance slowed marginally in the second quarter. The Federal Reserve once again raised interest rates in June and provided more detail on its plan to gradually wind down its $4.5 trillion in asset holdings toward the end of the year. Despite the likelihood that tax reform adverse to debt won't pass in the U.S. this year, S&P Global Fixed Income Research's 2017 forecast for bond issuance has been revised downward since last quarter as prospects have diverged between the U.S. and Europe on one hand and the rest of the world (notably China) on the other. Considering the issuance totals in the first half of the year, along with macro political trends expected for the remainder of the year, issuance totals in 2017 are likely to slightly decline from 2016. We feel that these factors, when combined with our quantitative frameworks, will result in global bond issuance finishing 2017 about 5.3% lower than in 2016.

We feel issuance in the second half of the year could still prove volatile on a monthly basis but will ultimately follow the historical norm of representing a slightly smaller proportion of the annual total compared with the past six months. Positive global trends for issuance are coming largely from the U.S. and Europe, including the European Central Bank's (ECB's) quantitative easing (QE) program and the increasing likelihood that debt-deterring elements of corporate tax reform in the U.S. will not be a material prospect for the remainder of this year, if at all. Additionally, expectations for slightly stronger GDP growth in the U.S. and Europe should keep issuance from noticeably declining in the near term. Potential risks to global bond issuance in the developed markets are largely limited to any potential fallout from the Brexit process; however, with the snap election in the U.K. and the French presidential election over, there is a broader sense of clarity regarding future negotiations, which should be less confrontational than initially feared. With most of the initial market reactions to Brexit over, both the euro and pound are expected to modestly strengthen relative to the dollar, stabilizing our dollar-based issuance figures in the region (assuming all else to be equal).

Working against these positive to benign factors, the reduction in issuance from China is enough to lower global issuance growth prospects. The government there has taken steps to rein in leverage over the past nine to 12 months, and alternative funding sources could replace the bond market in certain sectors. Meanwhile, Latin American issuance has improved somewhat from 2016 but is still well below that of prior years. Recent events in Brazil are only adding political risk to an already weak economy, and we anticipate negative effects on regional issuance as a result.

Overview

  • Geopolitical risks to future bond issuance have subsided somewhat from the beginning of the year. Future Brexit negotiations may prove less confrontational due to the weakening of the Conservative party after the recent snap election in the U.K. Meanwhile, recent political lassitude in the U.S. makes substantive or expedient tax reform less likely, and U.S.-Chinese trade relations have improved somewhat.
  • At the same time, expectations have grown for most developed countries' central banks to rein in their years-long monetary stimulus. The Fed raised interest rates again in June and is currently expected to do so one more time in 2017. Perhaps more important, it has started laying the groundwork for a reduction in its holdings of Treasury and mortgage-backed securities later this year.
  • Other central banks in developed markets have also started signaling that they could reduce stimulative measures, with some observers suggesting the need for more clarity in these banks' communications. Market reactions to such statements could cause short-term bouts of market volatility and should not be discounted, as the Taper Tantrum of 2013 has shown.
  • In China, the government has been raising interest rates in an effort to curb excessive credit growth since late 2016. This seems to have put a damper on new bond issuance, but given the large amounts of maturing debt ahead, it is more likely that financing sources have shifted outside of bond markets. Debt outside of the U.S. and Europe has fallen thus far in 2017, limiting both year-to-date totals as well as our overall growth forecasts for the remainder of the year.

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