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Volvo dips in to Europe’s ‘seized up’ bond markets

Swedish carmaker Volvo surprised investors this week by lending €500 million – a rare deal in parched European corporate bond markets that are extremely quiet even by summer’s standards.

Investors placed €3.2 billion in orders for the deal, one of the few to hit the market in a matter of weeks. The amount raised in European corporate bonds so far this year has fallen to its lowest level in nearly 20 years, down 18 percent from the same time last year. According to data from Refinitiv, European governments raised 47 percent less than in the same period last year.

Stock markets are even more muted. The amount raised from companies entering the stock market for the first time is down 92 percent compared to last year, data from Refinitiv shows.

The slowdown shows how shaky markets, a dark economic cloud from Russia and rapidly rising interest rates are all making it harder for companies to tap into markets that have been generous sources of funds for years.

“Primary markets are quite preoccupied with volatility [and] liquidity has been severely tested,” said Snigdha Singh, co-head of European fixed income, currency and commodities trading at Bank of America.

Years of low interest rates, exacerbated by the pandemic, encouraged a plethora of corporate and government debt deals as executives raised new funds and pushed existing debt service commitments further into the future.

But energy price shocks and global supply chain problems have shifted global central banks’ priorities from boosting inflation to venting it. The European Central Bank has halted its decade-long bond-buying program, which had acted as a safety net and comforted markets since the financial crisis.

The bank has now raised interest rates to zero, ending a decade of negative interest rates and the US Federal Reserve followed suit in raising borrowing costs.

With the ECB ripping its safety net and a recession looming across Europe, investors have shied away from funding riskier corners of the market. The amount raised by the lowest-rated, high-yield companies has fallen 79 percent so far this year compared to the same period in 2021, Refinitiv said.

Column chart of the amount raised through the issuance of government debt ($ billion) showing the decline in fund-raising by European governments from pandemic highs

“We had a pretty substantial pipeline in late spring [but said] ‘let’s put down the pen,’ said Tomas Lundquist, head of European corporate bond markets at Citi, adding that ‘in May and early June, the level of confidence we needed to get to get the best price possible wasn’t that great high”.

In addition, the rush of bond market activity over the past two pandemic years meant that “most companies had already mentioned debt and had no immediate financing needs,” he said.

Column chart of high yield ($bn) bond issuance showing Europe's riskiest companies facing a debt deal drought

Volvo’s move was more opportunistic. Citi’s Lundquist, who led the deal, said the automaker’s timing was “very good” after US inflation data was somewhat tame than investors feared and that the company “reacted very quickly when they saw this attractive window.”

That underscores bankers’ reliance on central bank policies to support activity for the rest of the year. Investors and analysts are trying to navigate the uncertain outlook using new data to paint a picture of if and when inflation will cool and predict the trajectory of major central banks’ interest rate changes.

US inflation rose 8.5 percent year-on-year in July, a slower pace than in June and lower than economists had expected, raising hopes that the pace of price increases in the world’s largest economy has peaked .

The data was closely watched by investors looking for clues as to how much the Fed will raise interest rates to curb rapid price growth.

Markets feel “slightly firmer” now compared to July, one banker said, “with some more stability and even some new business deals in Europe.” [in August]. There is more optimism.”

Stock markets may recover more slowly. The valuation of companies that have been listed in the market frenzy for the past two years has been lowered. For example, the valuation of food delivery service Deliveroo has fallen to around £1.7bn from more than £5bn when it quoted in London last year. That has deterred fund managers.

“Companies that were considering” [listing] take the time to see how things turn out, and sellers may also need to adjust valuation expectations,” said Tom Johnson, co-head of European capital markets at Barclays.

“After a market decline there is always a bit of ‘who wants to get off the curb first?’ Many publishers would rather see data points from other people first.”

Debt bankers remain more positive, saying they are encouraged by the recent recovery in bond markets. The total yield of Europe’s riskiest debt has fallen nearly 10 percent this year, but yields have recovered more than 6 percent since their trough in June, according to data from ICE Bank of America. An index that tracks higher-quality debt has also recovered more than 5 percent since a low in June.

Bankers hope a few successful deals can encourage more people to get in.

“We should not underestimate the herd mentality,” said Josh Presley, director of Credit Suisse. “One good deal will open the door for others to follow.”

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