Credit Trends: Global Financing Conditions: Blockbuster Growth In 2024 With Tailwinds Heading Into 2025

Positive Growth And Lower Rates Should Benefit Issuance Growth In 2025

Rates are likely to fall in 2025. 
Recent signals by the Federal Reserve and most economic data in the U.S. point to a lower federal funds rate in 2025 (see chart 2). S&P Global Ratings economists also believe the European Central Bank will cut in each of the next four quarters. This will likely generate fairly immediate relief for loan issuers via lower benchmark rates.

But it is less clear if longer-term rates will follow suit. We assume that 10-year benchmark government rates will decline to roughly 3.4% in the U.S. and average about 2.2% next year in Germany. Given we do not expect recessions next year, these are good proxies for comparable declines in the private sector.

Also, the current 10-year Treasury rate in the U.S. is roughly 94 basis points (bps) below the effective fed funds rate, further supporting modest declines for long-term rates ahead. Still, after years of rapid rate increases by central banks and scuttled expectations for cuts in the past, borrowers will welcome lower rates in 2025, even if they prove modest.

Lower rates may spur more mergers and acquisitions (M&A) and other growth-oriented demands for debt. 
M&A activity has been relatively stable since mid-2023 but still below the pre-pandemic pace (see chart 3).

A pullback might have been expected after the boom in 2021, but elevated real interest rates have also gotten in the way. A majority of leveraged buyouts have been funded via equity this year and last. With inflation cooling and nominal rates expected to fall, real interest rates will likely decline, potentially stimulating debt-funded M&A.

Upcoming maturities support continued investment-grade issuance. 
Globally, roughly $7.6 trillion in investment-grade (rated ‘BBB-‘ or higher) outstanding debt is due in 2025-2028 (see chart 4). This is up from $7.26 trillion at the start of the year, despite strong issuance totals so far in 2024.

Much of this has been the result of financial institutions issuing more shorter-term (one to three years) debt, keeping total maturities elevated in the near term. We believe this trend will keep global corporate issuance high next year, at least for investment-grade issuers.

On the other hand, lower speculative-grade (rated ‘BB+’ or lower) debt outstanding could limit issuance needs. 
Through September, roughly 75% of all speculative-grade debt issuance this year has been for refinancing, and this has reduced the amount of debt outstanding over the next several years (see chart 5).

This may dampen speculative-grade issuance growth next year and leave more to be done through increased M&A funding. That could limit speculative-grade debt growth in the speculative-grade space, but not necessarily lead to a marked decline in 2025 as the appeal of call options will likely increase next year, where available.

While we expect moderate issuance growth in 2025, we see several possible upside drivers:  

• Economic growth could be stronger than we expect while inflation continues to cool–essentially a continuation of the favorable conditions in 2024.
• China could issue more than we expect given recent moves by the central bank and on the fiscal side to boost confidence and economic growth. Before the pandemic, China’s issuance growth was very strong across all asset classes (see chart 6). It has slowed in recent years as the government has attempted to reduce leverage. Although we expect China’s debt use to continue to moderate, issuance conditions in China appear fluid, and we will be watching them closely.

• AI investment could increase (see chart 7). Recently, global high-tech firms have started issuing more debt to build AI infrastructure. Previous waves of high-tech bond issuance include the pandemic, when ultralow interest rates spurred growth, much as they did for other sectors. Another came roughly 10 years ago, driven by large U.S.-based tech companies ahead of eventual tax reform in 2017. However, the AI arms race is global, and the U.S. share of the more recent issuance increase is smaller than during prior surges–a trend that could continue and portend much more issuance.

What could go wrong? 
Strong momentum as 2024 ends, along with generally positive expectations for rates and economic growth, should support continued increases in bond issuance in 2025 for most sectors, if slower than this year. But this is not without risks:

• Geopolitical risks–hard to quantify or price–were elevated coming into 2024, and have arguably become more so.
• Overall debt levels, particularly for many governments, have also become much higher in recent years, threatening to systemically raise borrowing costs in a classic “crowding out” effect (however, this doesn’t appear to be happening yet).
• Rising threats to global trade could prolong the already slow descent of inflation, forcing central banks to slow or pause easing.
• Although not currently in our expectations, an abrupt global slowdown or regional recessions would certainly cut into primary market activity. This would be particularly true if it were to manifest quickly, given most market participants also currently expect healthy growth ahead.

Many of these potential challenges are interconnected, making their combined impact more severe, if realized.

Issuance Projections

We expect nonfinancial issuance to increase 30% in 2024, and another 7% in 2025. 
The pace of nonfinancial issuance skyrocketed roughly 40% year over year in the third quarter, pushing the year-to-date growth rate to just over 25%.

We expect positive momentum to continue through the remainder of 2024, compared with a weak fourth quarter last year. This should lead to even larger gains for 2024. For 2025, this year’s large haul may be difficult to follow, but we expect modest growth.

Lower rates may finally help M&A activity grow a bit past the somewhat lackluster trends since 2022. Our economists expect other forms of capital expenditure and investment to grow modestly next year as well, which, with likely lower rates, could increase debt funding.

Refinancing activity has been high in 2024, which could offset next year’s issuance growth, particularly for speculative-grade issuance. Upcoming investment-grade maturities are still large, though, and we anticipate this rating grade to dominate next year’s rated issuance.

We expect nonfinancial corporate issuance will only just fall short of what would put it back on track with the roughly 4.65% compound annual growth rate from 2012-2019 (see chart 8). After four years of unusual swings, issuance growth may be returning to previous trends. However, some pull-back from the pre-existing rate may not be unexpected either, considering strong growth from China was an influencing factor from 2015-forward, and we expect it to remain slower next year.

The pace of issuance growth from China has declined in recent years but could provide an upside surprise if authorities attempt to stimulate the economy. However, this is not currently in our base-case assumptions as GDP targets appear to be less of a priority in recent years than debt stabilization, particularly in the real estate sector.

We expect financial services issuance globally to grow about 14% in 2024, and 7.5% next year. 
Upward revisions to the first half of the year, combined with solid growth of about 18% in the third quarter, have resulted in global financial services issuance expanding about 15% year to date.

Issuance momentum for financial services puts the sector on track for a record total this year. While this may be tough to beat in 2025, we see potential for growth. For instance, we expect U.S. banks to maintain steady issuance next year.

Banks typically contribute about one-third of annual financial services issuance in the U.S. In 2024, U.S. bank issuance has benefited from an easy comparison against 2023, when large banks pulled back. Sustained deposit outflows finally ended in the fourth quarter of last year but resumed in the second quarter of this year. And trends in deposit flows generally lead near-term issuance (see chart 9). That said, while easier comparisons may be in the past, we don’t anticipate any noticeable decrease in their issuance totals next year.

We anticipate continued strong issuance next year in Europe, where banks contribute roughly 60% of annual financial services issuance. We expect healthy issuance from banks as they aim to meet their loss-absorbing capacity buffers, particularly their eligible minimum requirement for own funds and eligible liabilities instruments. At the same time, we expect banks to continue to rely less on central bank funding and more on debt.

For China, financial services issuance growth has slowed since 2021, after years of exceptionally strong growth. We anticipate this moderation will continue, given the country’s overarching debt reduction efforts. However, as with other sectors, issuance could surprise to the upside if the government and central bank increase supports amid flagging demand and economic growth.

Global structured finance issuance could rise 20% or more this year, then decline slightly in 2025 from these lofty totals. 
Through the third quarter of 2024, global structured finance issuance tallied $1 trillion, up 26% year over year.

We initially expected the strong start to the year to moderate as 2024 progressed. After a strong second quarter alleviated risks, that moderation occurred in the third quarter, when issuance fell 20% from the previous quarter. We expect this moderation to continue in the fourth quarter.

We expect global structured finance issuance to remain strong but fall 7% (with a range of -14% to flat) in 2025, largely based on decreased issuance in the U.S., which has arguably already been stronger than the growth in underlying collateral would indicate. While further rate cuts and spread tightening should support issuance, we think it will slow relative to such a strong 2024, and we expect growth will be mixed across regions and asset classes.

While we expect consumers to benefit as central banks continue to lower rates, the pace and magnitude of further rate cuts and how long they take to materialize to individual consumers remains uncertain and will vary by region. As a result, consumer-facing sectors like asset-backed securities (ABS) and residential mortgage-backed securities (RMBS) will be in focus in 2025. Not only do they represent the lion’s share of global structured finance issuance, but they are also most rate sensitive. Higher-for-longer rates could dampen issuance in these sectors.

Some challenges are emerging in the U.S. as well, including rising delinquency rates for credit cards and auto loans, as well as expectations for only modest increases in home sales next year. In Europe, expectations for real wage growth should stabilize consumer spending there, or support increases, but the U.S. share of issuance dominates the global total.

The European structured finance market grew 12% through the third quarter, largely due to a 65% increase in securitization issuance that owed to the 88% uptick in collateralized loan obligation (CLO) issuance and robust increases in ABS and RMBS.

We expect strong year-end issuance for covered bonds relative to previous years, albeit down from the post-financial-crisis highs of 2023. While covered bond issuance declined marginally (11%) in Europe in the third quarter, it was a bright spot in the first quarter.

We expect U.S. public finance issuance to expand 27% in 2024, but decline about 8% in 2025. 
Like other sectors, U.S. public finance has continued to surprise to the upside this year, and substantially so. We expect some slowing in the fourth quarter given the upcoming election and associated potential for market volatility, but we still expect roughly another $100 billion to come to market this year.

We forecast a decline of about 8% for next year, largely due to the likelihood of close to $490 billion being issued this year, which would be difficult to exceed. U.S. municipals stand to benefit (and arguably have already) from a few tailwinds:

• Depending on the outcome of the upcoming general election, potentially higher marginal tax rates for higher-earning individuals could make tax-exempt municipal debt more appealing.
• Compared to other sectors, USPF has had the slowest growth in debt outstanding, constricting supply, helping keep demand strong. This may keep its comparable market yields lower than those of other sectors, which may make issuing debt less costly in the year ahead.
• Credit quality in this sector has noticeably improved in 2024, which should lessen credit risk for investors and lower borrowing costs for issuers, all things being equal.
• Upcoming refinancing needs could contribute to potential issuance, although as in other sectors this year, some of this may have already been addressed given recent market demand.

We expect IPF issuance to decline about 7% this year but rebound slightly in 2025. 
Through the first nine months of the year, international public finance (IPF) issuance is roughly equal to the same point in 2023. That said, the fourth quarter of last year had a very large total, which we think will prove difficult to match.

We project a slight increase of 3% for 2025. Sustained high issuance out of China should provide a floor, likely keeping IPF a $1 trillion market annually. But issuance this year has been particularly strong outside of China, and we think it may be difficult for other countries’ public finance markets to maintain this pace.

Though not in our base case, any shift in China’s policy that could spur debt issuance could have very large repercussions for global totals. For example, issuance could increase if China raises debt ceilings for local governments to help swap out off-balance-sheet debt from local government financing vehicles. It remains to be seen, however, if these increased debt ceilings would occur at the local or central level. For this reason, our range of projections is wider for this sector than for others.

2024 year-to-date issuance summary

Global bond issuance through September totaled $7.1 trillion, up 18% from $6 trillion at the same point in 2023. U.S. public finance had the largest gain (up 36%), followed by global structured finance (up 25.6%), driven largely by the U.S. Global nonfinancial corporates’ issuance expanded 25.3% after a particularly strong third quarter (up 40.5% compared to last year), and global financial services issuance grew 14.8%. The only sector to decline this year has been IPF, down a barely noticeable 0.5%.

These figures cover only debt with maturities greater than one year and exclude debt issued by supranational organizations and sovereigns. All references to investment-grade and speculative-grade debt are to issues rated by S&P Global Ratings.

Yet Another Strong Quarter For U.S. Primary Markets

U.S. issuance was surprisingly strong in the third quarter, particularly in September. Issuance benefited from:

• Progress toward a soft landing,
• Easing monetary policy,
• Tight corporate spreads,
• Refinancing needs and repricing opportunities, and
• High uncertainty ahead–mostly owing to significant geopolitical risk and U.S. election risk.

If most refinancing risk has deteriorated, the downside has been still elevated borrowing costs. This could weigh on speculative-grade companies, which have more strained liquidity and operating margins. Indeed, distressed ratios remained higher than at the beginning of the year, despite being below their long-term average, confirming that higher interest rates will continue to weigh on issuers.

While markets have been resilient, currently worsening geopolitical risk, U.S. policy risk, and significant sensitivity toward macroeconomic data (as occurred in the first week of August) could heighten volatility in the fourth quarter (see table 2).

U.S. Investment-Grade Bond Issuance Rose In The Third Quarter

Investment-grade issuance increased 12% over the previous quarter to $319 billion–the second highest quarterly volume since first-quarter 2022. The market was particularly open for ‘BBB’ rated issuers, which raised $172 billion, contributing over half of quarterly investment-grade issuance. ‘AA’ issuance doubled its previous-quarter volume, reaching $30 billion. Within the category, high tech company Meta Platforms Inc (which we rate ‘AA-‘) issued $10.5 billion of 5.1% yield-to-maturity notes with a tenor of over 23 years.

Speculative-grade corporate issuance fell slightly from the previous quarter to $64 billion. ‘CCC’ rated issuance overcame $2 billion for the third consecutive quarter but remained below 2020-2022 levels, when quarterly issuance average $9 billion. Topping the list of speculative-grade issuers was oil and gas company Occidental Petroleum (which we rate ‘BB+’), which issued $5 billion of 5.5% global notes with an average tenor of 12 years.

Rated nonfinancial bond issuance reached $244 billion in the quarter, up 23% from the previous quarter. Leading by volume were high tech ($57 billion), at 2.3x what it issued in the second quarter; utilities ($36 billion); health care ($29 billion); and oil and gas ($25 billion).

Third-quarter rated financial bond issuance retreated to $139 billion, $20 billion lower than the previous quarter, with nonbank financial institutions issuing the most (58%).

U.S. public finance issuance growth remains solid through September

U.S. municipal bond issuance was $136 billion in the third quarter, down slightly from $142 billion in the second quarter but up greatly from $98 billion in the third quarter of 2023. In fact, this was the highest third-quarter issuance since 2019.

The monthly average for the third quarter was $45 billion. The highest issuance came in July, with $49 billion, marking the highest single month of issuance since $73 billion in October 2019 (see chart 12).

Issuance so far in 2024. 
Breaking out issuance into components, new money issuance fell relative to 2023, while refunding and mixed-use issuance increased (see chart 13).

The three largest issues in the third quarter were from California, NYC Transitional Finance Authority, and New York City (see table 4).

So far in 2024, issuance by the top 10 states has risen 39% from this point in 2023, ranging from up 13% for Texas to up 125% for Massachusetts (see table 5).

U.S. structured finance issuance increased sharply through the third quarter

U.S. structured finance issuance continued to carry the global total, increasing 61% year over year to $581 billion through third-quarter 2024 (see chart 14). This already exceeds the full-year totals in the U.S. for 2018 and 2019.

We continue to believe higher risk-adjusted yield and the largely stable performance offered by many structured finance sectors will remain attractive to most investors into 2025. Furthermore, issuers are becoming more creative with their balance-sheet management by using securitizations as a funding tool. However, fourth-quarter risks include the upcoming U.S. election and escalating geopolitical conflicts.

U.S. structured credit. 
U.S. CLO new issuance volume was $142 billion through the third quarter of 2024, per Leveraged Commentary and Data from PitchBook, a Morningstar company. This already surpasses 2023’s full year tally of $116 billion and is 9% above 2021’s record pace of $131 billion.

Broadly syndicated loan (BSL) CLOs were up 75% to $115 billion, and middle-market CLO issuance increased 48% through the third quarter. While private credit has been a hot topic throughout the year, the share of middle-market CLOs as a percentage of total new issuance (19.2%) has dipped through the third quarter relative to the corresponding period last year (21.9%), falling short of expectations.

The leveraged loan market has been firing on all cylinders, with 12-month-trailing leveraged loan origination volume more than doubling through the third quarter of 2024 relative to that of 2023, setting the stage for further growth in structured credit issuance into 2025.

Furthermore, BSL CLO ‘AAA’ credit spreads have narrowed by about 40 bps in the third quarter relative to the end of 2023, and spreads for both BSL and middle-market CLOs returned to pre-pandemic levels.

The spread basis between CLO spreads in the U.S. (and in Europe) has also narrowed. Strong investor demand for floating-rate debt continues amid increasing confidence in economic conditions. Spreads could tighten further in the beginning of the fourth quarter, although the U.S. election remains a wild card and could affect the direction of spreads thereafter.

ABS. 
U.S. ABS issuance grew 18% through the third quarter of 2024, with all major asset classes increasing except credit card ABS, which was down just slightly (less than 10%). While underlying issuance drivers differ across asset types, spreads over benchmarks have declined substantially relative to last year.

Auto loan and lease ABS–which generally lead U.S. ABS issuance, at over 40% of total volume in recent years–grew roughly 14% through September 2024, after a record 2023. Apart from rental car ABS, each subsector’s issuance grew through the third quarter of 2024 (particularly in leases and subprime auto loans), despite some affordability challenges posed by macroeconomic uncertainty, higher-for-longer interest rates, and generally tighter credit conditions. Several banks also returned to the market after being absent for several years, which contributed to the year-to-date growth.

However, growth has dropped this year. We expect auto loan ABS issuance to end the year well above recent years but moderate in the fourth quarter given recent credit deterioration in the sector. Delinquencies and losses in the prime and subprime auto loan segments have been increasing, reaching decade highs. We attribute this increase to more recent vintages having looser credit standards following the pandemic.

Our economists expect light vehicle sales to remain relatively flat over the next few quarters, increasing to 15.9 million by year-end 2025 (from 15.5 million forecast for the third quarter). However, higher sticker prices and higher-for-longer interest rates may rein in consumer spending in the sector.

RMBS. 
U.S. RMBS issuance was $121 billion through the third quarter of 2024, up 110% compared with the year prior (itself a lackluster year when issuance fell 40% from 2022 levels). Traditional indicators such as existing home inventory and home sales, starts, and builds are beginning to improve but remain constrained, keeping home prices at record highs. Adding to the supply shortage is the “golden handcuffs” phenomenon, in which borrowers choose to remain in homes where they have locked in low mortgage rates.

While the 30-year fixed-rate mortgage has fallen from its peak of nearly 8% in October 2023–its highest in over 20 years–it remains elevated at 6.44% as of Oct. 17. While this represents a decline of over 50 bps during the third quarter, it is higher than the roughly 6.2% in the week preceding the Fed’s rate cut. S&P Global Ratings economists expect the 30-year conventional mortgage rate to fall to 4.9% by end-2025.

Sales of new single-family homes were up 9.8% in August 2024, compared with August 2023. Meanwhile, privately owned housing starts were up 3.9%, while building permits were down 6.5%. Higher buyer activity will likely support increased RMBS securitization in the fourth quarter and into 2025.

Another factor that could be contributing to the growth in RMBS issuance is the proposed Basel III Endgame, or Basel IV (set to be implemented in 2025). The current proposal would increase risk weights for mortgages. To prepare for these new standards, banks might increasingly turn to securitization to manage their balance sheets, offloading riskier whole loans from their balance sheets by issuing nonagency RMBS.

CMBS. 
U.S. commercial mortgage-backed securities (CMBS) recorded the highest issuance increase among all sectors once again through the third quarter, up by over 175%, albeit 2023 just reached 2020 levels. While last year’s rapid increase in interest rates, wider spreads, and broader uncertainty brought down issuance, the impact has since subsided, particularly in the single borrower space.

Future demand for office and retail properties remains uncertain due to the rise in remote work since the pandemic began and ongoing competition with e-commerce, respectively. However, other property types have picked up last year’s slack, with most seeing issuance levels exceed their previous-year totals.

Investors are targeting property types with stronger collateral performance: lower delinquencies, potential for higher rent growth, favorable property valuations relative to others, etc. These include multifamily and industrial properties, up nearly 2,000% and 800%, respectively, through the third quarter.

Multifamily property distress has declined, with many properties being built to keep up with demand. Moreover, industrial properties continue to benefit from the pandemic-induced boom in e-commerce, with warehouses and distribution centers significantly outperforming enclosed regional malls and other retail properties. Meanwhile, lodging and multiuse properties also had robust issuance growth through the third quarter.

Financing Conditions Look Benign In Europe

Corporate yields kept tightening in Europe over the third quarter–60 bps for investment-grade issuers and 70 bps for speculative-grade ones. Government yields were on average 40 bps lower, further compressing corporate spreads.

Money supply remains restrictive, with credit standards unchanged for firms, easing for housing loans, and tightening for consumer credit.

The leveraged loan distress ratio was 3.4%, from 3.1% in the second quarter, as the number of regional defaults remained elevated, although we expect the default rate to decline to 4.25% by June 2025. We expect financing conditions will likely remain constructive in the fourth quarter of 2024, despite bouts of market volatility, because European economies have resumed growing and we expect further rate cuts.

Markets issuing less in Europe

Investment-grade issuance decreased 17% in the quarter, tapping €165 billion (nearly half of the first quarter’s record levels). The ‘AAA’ and ‘AA’ categories particularly suffered, while the ‘A’ and ‘BBB’ categories jointly contributed 87% of overall investment-grade issuance. Thirteen of the 15 largest issuers in the quarter were financing institutions. Banco Santander (which we rate ‘A+’) topped the list with €8.2 billion between floating- and fixed-rate notes due in five to seven years.

Speculative-grade issuance reached €34 billion–22% lower than last quarter. Despite the ‘BB’ category contributing 51% of overall speculative-grade issuance, ‘B’ rated issuance has progressively gained prominence, contributing 49% of the quarterly issuance (versus its five-year average of 38%). The top issuer was U.K.-based telecom Zegona PLC (which we rate ‘BB’), with €2.1 billion of 7.5% senior secured notes due in five years.

Rated nonfinancial bond issuance amounted to €72 billion, markedly lower (-26%) than the previous quarter. Utilities (€14 billion), consumer products (€6 billion), and automotive (€6 billion) led by volume. Rated financial bond issuance declined by 12% quarterly to €122 billion, despite an 8% surge in banking issuance.

European structured finance volume was up 12% through the third quarter

European structured finance volume grew 12% through the third quarter of 2024, largely attributable to robust increases in securitization markets, while covered bond issuance fell roughly 11%. Investor-placed securitization was up across all major sectors while CLO, ABS, and RMBS had the highest volume (see chart 16).

Covered bonds. 
European covered bond issuance slipped below last year’s record pace in the second quarter, in part because of a stall in June due to wider market volatility surrounding the election in France–the largest market for covered bond issuance. However, activity picked back up in September, reflecting resilient market appetite. European covered bond issuance is now down roughly 11% compared to the corresponding period in 2023.

While growth is negative, covered bonds are a valuable source of funding strength and diversification for banks, and central banks are typically large holders of securities, particularly during quantitative easing. As bank deposits have dropped from their peak following the height of the pandemic, covered bonds have been a preferred long-term funding source at lower prices. Furthermore, covered bonds remain insulated from many global market disruptions, and normalizing central bank policy in Europe has brought more issuers to market.

Issuers appear to have favored covered bonds relative to more expensive sources of funding amid higher-for-longer rates. However, unsecured funding conditions are beginning to improve (depending on the jurisdiction), which could reduce demand for secured funding sources such as covered bonds.

Higher European covered bond issuance over the past two years largely owes to favorable borrowing costs, given higher rates. In addition, most of the European Central Bank’s targeted longer-term refinancing operations–a program to offer longer-duration loans at favorable costs–have now been paid off. Banks may now look to central bank issuance as a source of funding, which could support covered bond issuance.

Leveraged loans and CLOs. 
As in the U.S., primary issuance of leveraged loans picked up substantially through the first half, up 130% compared to near decade lows in third-quarter 2023. CLO issuance follows the trend in leveraged loan origination volume with a lag of about four quarters.

With the substantial increase in leveraged loan originations, the packaging of European CLOs increased 88% through the third quarter of 2024, which we attribute to continuous spread tightening in the first three quarters relative to year-end 2023 and increased year-to-date new loan issuance. The spread tightening on new CLO issuance has spurred refinancing and resets of outstanding transactions. Through September 2024, there have been 51 refinancings or resets in Europe, compared to just one in the corresponding period of 2023.

RMBS. 
We believe ABS and RMBS will maintain strong issuance growth into 2025 relative to their U.S. counterparts, where consumers are under more strain.

European RMBS issuance is up nearly 40% through the third quarter, despite falling roughly 20% year over year in 2023. The increase stemmed mainly from a rise in issuance in the U.K., France, and Ireland relative to the corresponding period last year. Further, banks have originated a greater share of year-to-date European RMBS issuance.

ABS. 
European ABS also contributed to increased structured finance issuance in Europe through the third quarter, with robust growth in France, Italy, and German auto and other consumer ABS. Consumer spending in the Eurozone has been the main driver for economic growth in the region. Real incomes continue to accelerate, and consumer sentiment has improved with inflation coming down and the start of interest rate cuts.

Emerging Markets Issuance Remains Robust

Corporate spreads are near historical lows. Sovereign yields moderated after the Fed cut rates, which could cause capital inflows to emerging markets. Corporate yields remain elevated for investment-grade companies, while they’ve reached neutral levels historically of around 8% for speculative-grade issuers. Prolonged market volatility is the main downside risk.

Emerging market issuance reaccelerated in the third quarter to $27 billion, up 62% from the previous quarter. Investment-grade issuance covered all the increase, as speculative-grade issuance–mostly from the ‘BB’ rating category–maintained the second quarter’s solid $9 billion (the highest since second-quarter 2021).

Most importantly, the third quarter saw ‘CCC’ rated issuance for the first time since fourth-quarter 2021, with Argentine utilities Pampa Energia and Transportadora de Gas del Sur and state-owned oil company YPF tapping the international market to refinance a cumulative $1.4 billion with an average 8.6% yield to maturity and a seven-year tenor.

In the first nine months of 2024, emerging market issuance already sits at 89% of last year’s record level, with China representing the lion share (86%), largely unrated. However, some regional discrepancy lies behind the numbers, with China and Eastern Europe, the Middle East, and Asia having already issued around 110% of their 2016-2023 average full-year volume, Latin America 91%, and EM Asia only 67%.

Topping the investment-grade list, UAE brokerage ADNOC Murban (which we rate ‘AA’) issued $1.1 billion of 16-year notes at average 4.8% yield to maturity. By sector, utilities posted a very strong quarter, contributing half of the nonfinancial corporates issuance, amounting to $13 billion. Financial issuance moderately increased to $11 billion: Brokerage was strong, while banks took a breather.

IPF total issuance remains consistent with year-to-date 2023

After declining through the first half of the year, IPF issuance has caught up through September, falling only 0.5 percentage points from last year’s comparable total. China accounted for 73.5% of the year-to-date total–lower than the 82.2% through September 2023–but easily remains the main contributor of global bond issuance for this sector. That said, Chinese issuance is down almost 9% for the year thus far.

Outside of China, issuance is up by 52.4%, with increases across most countries. Canada has led the charge, expanding 116% to over $101 billion, or 40% of the non-Chinese total. Consistent with historical trends, Canada, Germany, Japan, and Australia led the non-Chinese total, accounting for 84.3%, or $212.6 billion.

Data on non-U.S. public finance volume is not reliable for determining the true size of overall borrowing, but these numbers can point to major trends. In the four years prior to 2020, issuance was extremely high (over $630 billion each year, on average). In 2020, issuance exceeded $1 trillion for the first time, and IPF has since remained a $1 trillion bond issuance market.

Structured finance issuance growth outside of the U.S. and Europe continued to fall

Structured finance issuance outside of the U.S. and Europe continued its year-over-year decline (down 20%) through September, with declines in nearly every region, but were mixed across sectors.

Australian RMBS remained the bright spot in the third quarter, up roughly 50% relative to the same period last year, with a large uptick in prime RMBS. More nonbanks are originating self-managed superannuation fund loans to diversify their portfolios and are becoming more prominent in Australian RMBS transactions. Despite elevated interest rates, which continue to weigh on housing affordability, low unemployment in the region and a stable economic outlook will likely support mortgage originations, particularly as the rental market remains tight.

Australian ABS also exhibited 33% year-over-year growth through September, and the sector has gained a significant share of securitized volume over the past few years. We believe this will continue as pressures facing consumers, such as high interest rates and persistent inflation, ease.

Despite this growth, Australia’s year to date tally was roughly flat with that of last year on a 59% decrease in covered bond issuance.

Meanwhile, some sectors had little to no issuance, such as CMBS and structured credit. Covered bonds, which have shown atypically large issuance from some countries in recent years, appear to have pulled back thus far (down 47%), with no issues from Japan or New Zealand. We believe covered bond issuance outside the U.S. and Europe will improve in 2025, if interest rates and inflation continue to fall and labor markets remain tight.

Related Research