Navigating the Ebb and Flow: A Deep Dive into 2023's Credit Supply Landscape

In the world of finance, understanding the dynamics of credit supply is crucial. It influences investment decisions and shapes global markets. The recent developments in the US Dollar credit supply have caught the attention of market professionals and enthusiasts alike, triggering insightful discussions around it. Let's delve deeper into these trends and understand their implications for the market.

Overview: The State of Credit Supply

Credit supply in the US this year has shown a rather interesting trajectory. A moderate pickup in the financial supply has been observed while the corporate supply remains at a relative low. The situation is further nuanced by the anticipated downturn in Reverse Yankee supply as USD spreads start to outperform their Euro counterparts.

For a bit of context, the corporate supply for June hit a low for the year, totaling just US$29 billion, which is only slightly lower than June 2022 levels. However, when we look at the bigger picture, the year-to-date supply is still substantial at $428 billion. This figure surpasses those of previous years, second only to the record-setting supply of $790 billion in the first half of 2020.

Simultaneously, the net supply for June was negative at -$25 billion, considering $54 billion in redemptions. This reflects a similar situation that we witnessed in April. It's worth noting that after an unusually high supply in May, healthcare took a notable dip with only $1 billion issued in June. Similarly, the Telecom sector also reported a significant drop, decreasing from $29 billion in May to a mere $1.6 billion in June. Overall, most sectors failed to show a significant uptick in supply compared to previous months.

The Decline of Reverse Yankee

Another interesting facet of the current credit supply landscape is the Reverse Yankee's situation. For those unfamiliar, a Reverse Yankee bond is a debt obligation that's issued by an American entity in a foreign market and denominated in a currency other than the US Dollar — in most cases, Euros.

The Reverse Yankee saw a decline from €12.2 billion in May to €2.7 billion in June. The total supply for 2023 now stands at around €30.4 billion, barely shy of the total €32.9 billion issued last year. The key driver behind this trend appears to be the recent outperformance of USD spreads. It has pushed the USD-EUR spread differential, especially around the five-year area, tighter. Consequently, issuing Reverse Yankee bonds has become less advantageous for US issuers. Therefore, we could expect lower levels of supply in the coming months.

Financial Supply: A Contrasting Scenario

Contrary to the corporate world, financials witnessed an upturn in supply during June with $39 billion in new issuance. This situation reverses the trend observed in May, where financials supply was down and corporate supply was up.

Of the total issuances in June, most were preferred seniors, contributing to a year-to-date supply level of $209 billion. It is significantly lower than in previous years and is more on par with levels seen in 2019.

Key Takeaways

For market professionals and enthusiasts, the implications of these trends are manifold. The shift in credit supply dynamics necessitates a recalibration of investment strategies. The low corporate supply, coupled with the potential decrease in Reverse Yankee supply, is likely to impact investment yields and borrowing costs. Meanwhile, the relatively low supply in financials compared to previous years hints at a potential investment opportunity, provided the trend continues.

Moreover, the current market condition showcases the innate volatility and interdependence of financial sectors. It emphasizes the importance of vigilantly tracking market trends and staying informed about the macroeconomic factors influencing these trends. Such understanding is instrumental in making well-informed financial decisions, mitigating risks, and identifying opportunities for growth.

In conclusion, as we navigate through the second half of 2023, one thing is clear: keeping an eye on the evolving credit supply landscape is not just crucial, but also intriguing. Whether you are a professional investor or a market enthusiast, these trends will surely make your finance journey more engaging and insightful.

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