Chart 1

Global new bond issuance through July 2019 totaled $3.96 trillion, up 8.9% relative to the same point in 2018.  The increase is mostly attributable to the international public finance sector, whose midyear total is 63% higher than last year's. Global nonfinancials saw a strong haul in July, coming in at a year-to-date total of $1.37 trillion, from $1.26 trillion last year. Issuance in U.S. public finance and global structured finance remained generally flat through July, while global financial services issuance is now up 2.3% for the year after a strong July total.

These figures include only long-term debt (maturities greater than one year) and exclude debt issued by supranational organizations. All references to investment-grade (rated 'BBB-' or higher) and speculative-grade (rated 'BB+' or lower) debt refer to those issues rated by S&P Global Ratings.

We expect global bond issuance to finish 2019 roughly 4% higher than the 2018 total (see chart 1 and table 1).  Our base-case assumptions for 2019 have changed somewhat, given the shift toward easing monetary policies by the Federal Reserve and European Central Bank (ECB) in recent months. Markets have responded favorably, supporting a stronger-than-expected issuance total for the first seven months of the year. These more accommodative stances by the central banks have helped lower borrowing costs for lenders after a particularly challenging end to 2018. Nonetheless, these changes are largely in response to slowing economic indicators globally, as well as increasingly volatile market reactions to lingering geopolitical stressors--both factors we believe will continue through 2019.

Table 1

Over the past seven months, global lending conditions have broadly improved.  Most borrowing costs are still falling or have gyrated at lower levels than at the start of the year. Some risk aversion persists, though, as speculative-grade issuance has thus far had a higher proportion accounted for by higher-quality borrowers, while yields at lower ratings remain volatile. Combined speculative-grade bond and leveraged loan issuance in the U.S. and Europe is running roughly 20% lower than in the first seven months of last year ($553.4 billion versus $687.8 billion). Meanwhile, Chinese authorities have eased their deleveraging campaign in the face of a slowing economy, helping Chinese corporate issuance to grow over 35% through July.

Because we report our issuance figures in dollars, exchange rate fluctuations are always a consideration.  Some appreciation in the U.S. currency has been observed in 2019 and, should it continue, could suppress issuance totals in the months ahead. As expected, central banks around the world have generally moved in a more accommodative direction, following the Fed and ECB, but other factors, such as increased potential for a "hard" Brexit, are also weighing on global exchange rates relative to the U.S. dollar.

Looking Ahead: Easing Monetary Policies Battle Slowing Economies And Trade Tensions

We expect this year's overall bond issuance to increase over the 2018 total by 4%. Economic growth projections remain positive but muted relative to 2018, while potential disruptors to financial markets remain largely unresolved. The U.S.-China trade dispute continues to deteriorate with no end in sight. The extended conflict appears to be affecting the Chinese economy, pushing the government to ease its deleveraging campaign. Effects in the U.S. have thus far come only in episodes of increased financial market volatility and temporary contractions in issuance. But as the global economy slows, we expect market reactions could become more severe, particularly if the situation worsens and the next round of tariffs affects imports in the consumer products sector.

Partly in response to these geopolitical concerns, the Fed and ECB have lowered or signaled the intent to lower their prime interest rates. While easing financing conditions should bolster bond issuance, they are still competing with slower growth and persistent market stressors. Nonetheless, the central banks' steps stabilized market sentiment enough for the first half of 2019 that issuance totals were somewhat stronger than anticipated. Assuming a base-case scenario of slower growth, some monetary stimulus by the Fed and ECB, and a stalemate in the U.S.-China trade conflict, issuance should be higher in the second half of this year than in the soft second half of 2018, which featured an unusually poor fourth-quarter showing.

Strong first-half totals will likely support growth in nonfinancial issuance

For 2019, we expect total (rated and unrated) nonfinancial bond issuance to increase by as much as 5% if market volatility stays in check and lenders come to market at a typical second-half pace. However, we haven't ruled out the potential for a negative market disruption at some point in the second half, so the total could come in slightly below that level. The stronger-than-expected issuance haul in the first half has improved our forecast so it now reflects an expansion in 2019, whereas we forecast a decline of 3%-7% at the start of the year.

This revision reflects the enthusiastic financial market reaction to the synchronized actions of the Fed and ECB to calm markets and stoke flagging economic output and low inflation. Easing lending conditions in the U.S. are expected to boost issuance this year, with a high likelihood of an increase greater than 10%. Some of this has resulted from a funding shift between high-yield bonds and leveraged loans within the speculative-grade segment once the Fed stopped raising rates. That said, leveraged loan issuance has fallen by about 38% in 2019.

Further, geopolitical headwinds have remained stubbornly unresolved for over a year. S&P Global economists expect GDP growth in the U.S. to reach 2.5% for 2019, but most of that expansion would be attributable to the strong first-quarter reading, which was propped up by increased inventory spending ahead of higher tariffs on Chinese imports.

Issuance in Europe is still expected to grow modestly in 2019. S&P Global economists expect economic growth to slow this year to about 1.1%. However, financing conditions in Europe are still quite favorable for borrowers. Sovereign yields in May were in negative territory, which has been lowering the floor on borrowing costs for private-sector issuers. Nonetheless, lenders remain more risk averse in 2019, and the rebound in speculative-grade issuance that was seen in the U.S. during the first half was much more moderate in Europe.

Meanwhile, emerging markets are seeing a marked divergence between Chinese issuance and all other countries' issuance. Economic growth in China has slowed to its lowest level in decades, reaching 6.2% in the second quarter of 2019, from a year earlier. This has prompted officials to ease elements of their recent deleveraging campaign in an effort to extend credit and assist the economy.

Financial issuance is likely to remain flat

We expect issuance among financial services companies to remain generally flat in 2019, though it could slightly increase. Market volatility appears to negatively correlate with U.S. and European financial services issuance and has been suppressing activity since the start of 2018. Actual equity volatility has been markedly higher than predicted since the start of 2018, and though currently low, it is expected to increase in the second half of 2019. U.S. bank reserves with the Fed have been trending downward in recent years, which has also preceded a drop-off in issuance that we expect to continue.

While we feel lower interest rates may support issuance for nonfinancials to some extent in Europe, the ECB's extension of a third round of targeted longer-term refinancing operations (TLTROs) will give regional banks a cheap alternative to the bond market for funding. That said, with yields in the region falling to near zero for many highly rated issuers, the attraction of the ECB's next round of loans is reduced. Still, our base-case expectation is now for less bond issuance by the region's banks.

Offsetting headwinds in developed markets, the upcoming maturity profiles of global financial institutions through 2020 will require sizable amounts of new debt for refinancing needs, particularly in China. Already, financial services issuance outside of the U.S. and Europe in 2019 is up 13.5% relative to the first half of 2018, portending growth for the annual total this year (outside of those two regions).

Structured finance issuance is expected to be flat, but with plenty of movement by sector

Globally, we continue to expect that combined investor-placed securitization and covered bond issuance could be broadly flat in 2019, once again coming in at about $1 trillion, whereas issuance rose by 18% in 2018.

While there is scope for further advances in some securitization sectors--such as U.S. residential mortgage-backed securities (RMBS)--others show more limited growth prospects and had a slow first half of the year. A sharp decline in the rate of underlying leveraged loan originations globally is likely a precursor to lower issuance of collateralized loan obligations (CLOs), for example. In Europe, lingering uncertainty over implementation details of a new regulatory regime for EU securitizations led to a significant hiatus in activity early in the year, meaning full-year volumes may struggle to post gains, despite some recovery in the second quarter.

While strong covered bond issuance has more than compensated so far, the ECB's relaunch of its cheap term funding scheme for euro area banks could dampen issuance prospects for the rest of the year. Issuers have likely also "front-loaded" supply, taking advantage of favorable market conditions to meet their annual funding targets early. Other downside risks include possible market and economic disruptions due to the U.K.'s ongoing Brexit deliberations.

Note that in this report, our figures exclude Chinese securitization issuance rated only by domestic rating agencies, as well as global CLO resets and refinancings.

U.S. public finance issuance remains low

U.S. municipal bond issuance in July fell short of the total from the same month in 2018. July was the third out of the last four months with lower volume this year than in the same month of 2018. Through the first quarter of 2019, volume was 19% higher than in 2018, but the past four months have erased that advantage. Volume is on pace for one of the lowest annual amounts in the past 10 years.

On the other hand, the low volume and a healthy appetite for municipal debt have pushed yields down and boosted returns in all municipal sectors. Issuance for new funding remains relatively high, as it was in 2018. The mix of new volume and refunding volume through July 2019 closely matched that of all of 2018 but remains below the totals in the years prior to 2018. However, the main difference is the dearth of exclusively refunding issues, which is suppressing overall issuance.

Should this pattern continue, we anticipate volume will remain well below that in the years preceding the Tax Cuts and Jobs Act (TCJA). The last round of tax reform suppressed volume in 2018, when issuance was 22% lower than in 2017. The slow first six months of 2019 suggest that the effect of the TCJA on municipal issuance will endure for the coming years, to the extent that we project 2019 volume to be marginally higher than the 2018 total, at about $345 billion. This compares to the average of approximately $400 billion from 2014-2017.

Asia pushes international public finance toward a substantial increase

International public finance volume remains higher through July than in 2018, and we project issuance in 2019 could exceed volume in 2018 by at least 30%. Asia remains particularly busy, while Europe and Canada are also ahead of last year's pace. Despite a drop in volume in 2018, the past four years have recorded the highest volume ever for international public finance, with 2018's total being the third highest.

The Fed Cuts Rates With Little Effect On U.S. Financing Conditions

As anticipated by many, the Federal Reserve cut interest rates in its July meeting, by 25 basis points (bps). Still, U.S. financing conditions at the end of July have generally stayed neutral to supportive, to the same extent as they did in June (see table 2). Financial markets have priced in several rate cuts by year-end, possibly overshooting the actual number. Speculative-grade bonds have had strong returns and increased new issuance thus far in 2019, while leveraged loan issuance has been declining this year in anticipation of lower interest rates ahead.

Actual and anticipated Fed actions will likely support lending conditions for the remainder of the year. But those tailwinds will likely clash this year with slowing economic growth, as well as deteriorating global geopolitical conditions. The ongoing U.S.-China trade dispute whipsaws markets weekly. At this point, it is difficult (at best) to see where the yearlong spat will end up. And even if we ultimately see a return to a more amicable situation than the current one, we do not generally expect a return to pre-dispute conditions at this time. We feel it is more likely the U.S. will maintain some of the existing tariffs.

Table 2

The list of geopolitical headwinds has been growing alongside expectations for a slowdown in global GDP this year, and the recent drop in Treasury yields reflects an expected flight to safety by market participants. Only the yield on the 30-year Treasury is above the effective federal funds rate of 2.38%, while yields on all other Treasury maturity lengths (from one month to 20 years) are below this level. Odds are currently 85% that the Fed's target rate will be lowered by at least 50 bps through the end of the year (per the CME FedWatch Tool), while the spread between the one-year swap rate and the federal funds rate has also inverted by roughly 40 bps, likely signaling cuts to the federal funds rate in the future.

With many taking multiple rate cuts this year as a given, markets have reacted optimistically since June. Yet despite spreads tightening about 6 bps in July, to 409 bps, we estimate the speculative-grade spread should have finished the month about 108 bps higher, based on various economic and financial indicators. The implied spread has exceeded the actual in eight out of the past 10 months, suggesting financial markets are overly optimistic in the face of sustained pressures against a gradually slowing economy.

Corporate issuance slows

July proved to be the slowest month for corporate bond issuance in the U.S. so far in 2019, with just $79.7 billion in total. Dollar volume from both the financial and nonfinancial segments was well below the monthly averages seen thus far in 2019, at $34.5 billion and $45.3 billion, respectively. Year-to-date new-issue volume at the end of July 2019 is up 2% over the comparable 2018 period, with $749 billion. Nonfinancial issuance increased 11.3% from 2018, with $461 billion, while issuance from financial institutions contracted 9.9% from 2018, at $288 billion.

Credit quality improved for financial issuance in July as the investment-grade share of newly issued bonds reached 89% of the total, higher than a monthly average of 83% so far in 2019. The share of speculative-grade bonds fell to 5% in July, lower than a monthly average of 9.45% so far in 2019.

Dollar volume issuance from banks rebounded in July with over $13 billion, more than double the prior month's total and the largest total for any financial institution subsector in July. Brokers issued over $6 billion, while insurance companies issued $5 billion.

The same can't be said for the nonfinancial segment, for which the investment-grade share of new-issue volume fell to its lowest level for any month so far this year, at 59%, below a monthly average of 70% so far in 2019. About 36% of total bonds were rated speculative grade, higher than a monthly average of 25% so far in 2019.

In terms of dollar volume, July was the second-slowest month for non-financial new issuance so far this year, at $45 billion, well below the monthly average of $65 billion so far in 2019. Among nonfinancial subsectors, consumer products accounted for the greatest share of issuance, with a $10 billion total, followed by aerospace and defense with over $8 billion, which was split between two deals. The media and entertainment and transportation subsectors also made significant contributions, with about $6 billion apiece.

Chart 2

The list of July's largest issuers spanned multiple sectors. The single largest issuer in the U.S. in July was Boeing Co., with the release of over $5 billion in senior unsecured notes, the proceeds of which are expected to be used for the approximate $4 billion investment in the previously announced joint venture to operate Embraer S.A.'s commercial aircraft and services businesses and for general corporate purposes. The second-largest issuer in July was UnitedHealth Group Inc., again with just over $5 billion, spread across five tranches of fixed-rate senior unsecured notes.

Table 3

Municipal volume edges past its 2018 pace

The municipal volume of $25.1 billion in July was lower than June's $36.3 billion total and below the July 2018 total of $27.7 billion. For the year, municipal volume is essentially even with 2018, up 1.73% from last year, which posted the lowest volume in five years. The exclusion of refunding bonds from tax exemption under the TCJA has drastically changed municipal bond issuance, and the awaited rebound into normal activity has not occurred. Our issuance projection for 2019 is $345 billion. This compares to $339 billion in 2018.

Chart 3

The rush at the end of 2017 was one of the main causes of the decline in early 2018, but S&P Global Ratings believes lower volume will continue in 2019 and beyond under the current tax code. The issuance of new-money bonds in 2018 was its highest since 2010, which indicates greater demand for investment in roads, bridges, schools, hospitals, water systems, and other assets funded by municipal debt. Yet even with an increase in new-money proceeds of $33 billion over 2017, overall volume in 2018 fell 24% lower than in the previous year. The same pattern looks set to repeat in 2019. Without a change to tax law or a significant infrastructure initiative at the federal level, state and local issuance will settle into a lower baseline than over the past two decades.

Chart 4 shows the marked decrease in refunding volume in 2018 and the projected similar issuance in 2019. The 2019 total is a rough approximation based on activity through July. However, the proportion of refunding volume through July 2019 resembles that of the entirety of 2018. About 32% of 2019 volume has been for refunding or issues that combine refunding with new money--the same proportion as in 2018. If that pattern continues, U.S. public finance volume will remain nearer to 2018's total than to the totals of the previous three years. In 2017, about 55% of volume went toward refunding or combined uses.

Chart 4

We expect volume to increase slightly in 2019, to $345 billion, representing a downward projection from our earlier estimate of $360 billion to $375 billion. We made this adjustment following the first quarter of 2019, even though volume was higher through this period than in 2018. Despite the increase, the first-quarter activity was still lower than normal--trailing that of 2017 by 16%, for example. The unexpectedly slow first quarter of 2019 and its similar proportion of refunding activity indicate to us that 2018's volume was less of a response to the heavy volume at the end of 2017 and instead a new template for the next few years. Before 2018, the baseline of municipal issuance was about $400 billion annually, a figure that the market approached in 2015 and surpassed in 2016 and 2017. In the current legislative landscape, the new standard for municipal volume will likely settle around $350 billion.

The TCJA permanently altered the municipal market in three key respects: 1) Reducing the corporate tax rate to 21% from 35% made the tax exemption of municipal bonds less attractive for corporations; 2) the elimination of the tax exemption for advance refunding bonds cut refunding activity by more than half in 2018; and 3) the cap on the deduction for state and local taxes further impeded the issuance of bonds, whose payment source is usually revenue from taxes. S&P Global Ratings does not expect changes in the tax code to offset these provisions in the near future.

In the short term, the most significant impact of the TCJA in 2018 regarding municipal bonds was the elimination of the tax exemption on advance refunding bonds. These bonds represented $91 billion of issuance in 2017. Removing this tool brought all refunding activity in 2018 to just $59 billion, the lowest figure since 2000. Refunding exceeded $100 billion from 2012-2017. It is possible that refunding activity will return to near its former level once bonds that would have been eligible for advance refunding reach their call date. In a few years, bonds that would have been advance-refunded may be refinanced without penalty. However, the lack of advance refunding will delay issuance for refinancing into later years.

The Federal Reserve reports that corporate holdings of municipal bonds have decreased in 2019. The nonfinancial sector was the only sector to report an increase in the first quarter, at $1.2 billion, but private depository institutions were down $46.9 billion. Property/casualty insurers were down by $3.8 billion, and life insurers were $1.4 billion lower.

The lower volume and the maturing of existing debt kept the size of the municipal market below $3.1 trillion at the end of the first quarter of 2019 (see chart 5). The market shrank a bit, by $5.8 billion, through July. From 2011-2014, the market shrank $129.8 billion before leveling out around $3.1 trillion. Notably, in 2017 the market edged lower despite the second-largest volume on record. Part of that was a high amount of refunding volume that was pushed into 2017 to avoid the negative impact of tax reform on refinancing debt in 2018. The refunding debt did not increase the amount of outstanding securities.

Chart 5

Perhaps instructive to the current circumstances, the market reached its peak in 2010 after the Build America Bond (BAB) program spurred high issuance in 2009 and 2010. BAB was a response to the financial crisis and spurred public-sector funding for infrastructure. In the third year of the Trump Administration, there is no momentum for a national infrastructure initiative. The only discussion that has received fleeting attention concerns tax credits to create incentives for jurisdictions to partner with private entities in infrastructure financing. This method would rely less on bond financing, which has been the traditional method of investing in infrastructure. Tax credits would also flow only to profitable revenue-generating projects, leaving out roads and bridges without tolls, schools, public safety facilities, and most public-sector capital assets.

The limit of $10,000 on federal tax return deductions for state and local taxes (SALT) is the other main impact of the TCJA on municipal finance. Opposition to the SALT deduction limit is highest in a handful of states like California and New York, where housing costs and taxes are high. S&P Global Ratings lists four states with at least nine counties possibly adversely affected by the SALT cap, along with 17 states with at least 16 counties that might benefit from the change. Given this balance of positively affected states, the cap on SALT deductions may be the most permanent provision of the TCJA affecting municipal bonds. The SALT cap hasn't noticeably manifested yet, but long-term effects could include financial stress on state and local entities and an additional hindrance to the issuance of bonds, debt service on which is usually paid for from SALT.

However, an unintended effect of the SALT deduction cap is the enhanced appeal of municipal bonds in an environment of relative scarcity. Since retail investors in states with high taxes face limits to the deduction on those taxes, many taxpayers appear more eager to gain tax-exempt income from municipal bond interest. Mutual funds are reporting high inflows into municipal bond funds, and issuers are paying lower yields as a result. This in turn is leading to higher returns on municipal bond indices.

The lower supply of municipal debt is probably also leading to lower yields. Investors push yields lower as they purchase municipal bonds for tax benefits or other purposes. A smaller supply of debt increases the downward pressure even more. The S&P Municipal Bond Index yield fell to 1.92% at the end of July from 2.72% at the end of 2018. This decline is greater than that of U.S. Treasury notes, which had a yield of 2.02% at the end of July, down from 2.69% at the end of 2018.

A key distinction between the declining yields for municipal debt and federal debt is that the former are propelled by a lack of supply, while the latter stem from concerns over the prospects for slower economic growth in the U.S. and internationally. In fact, through February, municipal and Treasury yields were diverging, with municipal rates steadily declining and Treasury yields doing the opposite. Only the more recent decline in U.S. Treasury yields, brought on by investors seeking security in a volatile market, has brought the Treasury yield into its current parity with municipal bonds.

Municipal returns were positive in July for the seventh month in a row. The return on the S&P Municipal Bond Index through July was 5.75%, an extremely strong performance considering that the index returned 1.35% for all of 2018. All sectors have generated at least 5% returns in 2019, with health care, transportation, and higher education returns each topping 5%.

The Colorado Health Facilities Authority issued the largest transaction in July, for $1.6 billion. The transaction was associated with the creation of CommonSpirit Health, which was the consolidation of Dignity Health and Catholic Health Initiatives (CHI). The debt issued will primarily refinance the debt of Dignity Health and CHI. Another large issue related to health care was the Brookhaven Industrial Development Authority's $736.8 million transaction to finance part of a $1.5 billion campus for Children's Healthcare of Atlanta. Three transportation issues were among the largest transactions of the month (see table 4).

Table 4

Texas entities issued more than any those in any other state in July, with $4.7 billion, increasing the 2019 total to $20.7 billion, similar to the state's pace at this time in 2018. Eight of the top 10 states are ahead of last year's issuance, although among the top three, California is slightly below 2018 and New York is down 21%. Florida, the fourth-highest issuer, has doubled its 2018 volume through July 2019 (see table 5).

Table 5

Structured finance issuance still trails a strong 2018

Structured finance issuance in the U.S. reached $294 billion year to date at the end of July, down about 5% from the comparable 2018 period, when issuance reached a postcrisis high (chart 6). So far, 2019 is proving to be the best-performing year after 2018 since the crisis. Momentum had already begun to wane during the period of wider capital market volatility that began in late 2018.

Overall, the issuance of $38 billion in July was up 3% year over year, marking the third month of 2019 for which monthly volume exceeded the year-ago total, despite July's total being the second lowest for any month this year. The RMBS sector is the main bright spot, exhibiting significant year-over-year growth, while most other sectors are down compared with the first seven months of 2018. We expect that U.S. structured finance volumes could still end the year broadly flat, with continued growth in the RMBS sector likely offset by contraction in other areas.

Chart 6

By asset class, the CLO sector posted the highest volume in 2018, at over $135 billion, although issuance began to slow toward the end of the year. In the first half of 2019, U.S. CLO issuance continued to slow and was down by 15%, with $70 billion, at the end of July. Underlying leveraged loan issuance is a leading indicator of CLO volumes, and the 12-month rolling rate of U.S. loan originations has declined by over 25% since July 2018.

More generally, the leveraged loan sector has also begun to attract scrutiny from central banks and supranational watchdogs concerned about falling credit standards, with potential implications for financial stability when the credit cycle turns. In addition, some Japanese bank investors that were recently significant buyers of senior CLO tranches in both the U.S and Europe have now stepped away. For these reasons, CLO issuance volumes may moderate further in the second half of 2019.

We note that our CLO issuance figures here do not include additional U.S. CLO pricings that take the form of resets and refinancings of legacy transactions. These amounted to $155 billion in 2018. Significant spread tightening on CLO liabilities over the past few years has motivated CLO collateral managers to refinance transactions that they structured when spreads were higher, calling the outstanding securities and reissuing debt with lower coupons. However, there is a declining stock of outstanding transactions for which refinancing makes economic sense, given that CLO liability spreads have recently been widening, and refinancing and reset activity has already declined significantly in 2019.

In many other sectors--including those backed by lending to consumers--the path of underlying credit growth will likely help determine the scale of securitization issuance. The asset-backed securities (ABS) sector saw modest volume growth in 2018 but was down more than 14.5% year to date at the end of July after a slow start. Most areas within ABS have seen significant year-to-date declines, with the exception of the largest subsector, comprising transactions backed by auto loans and leases, where issuance was up by more than 9.6%. Although U.S. new-auto sales could decline slightly in 2019, we still expect modest growth in auto ABS issuance for the year as loan originations increase due to higher used-vehicle demand and rising prices. However, auto manufacturers are among the securitization originators most likely to see disruption if trade policy tensions escalate between the U.S. and other countries.

RMBS was the only major U.S. structured finance sector showing year-to-date growth at the end of July, with issuance of $60 billion so far, corresponding to an increase of more than 56%. While still an order of magnitude lower than pre-crisis norms, U.S. nonagency RMBS issuance has generally been strongly rising over the past few years. In 2018, the sector posted its highest volume since 2007. Growth has come not only from traditional subsectors, but also from areas such as credit risk transfer and nonqualified mortgage transactions.

After many years following the subprime crisis during which the majority of U.S. mortgage loans were funded via government-sponsored enterprises, there is now a growing appetite for distributing residential mortgage risk once again through private-label securitizations. In 2019, continued readoption of securitization as a funding tool among mortgage lenders is leading to further growth in RMBS issuance, particularly in the nonqualified mortgage segment.

European Financing Conditions Improve, But Market Threats Loom

Since the start of 2019, the ECB has held interest rates at historical lows, and is now expected to provide more stimulus as soon as September. Yields on many of the region's sovereign bonds are now below zero, and investment-grade corporate bond yields are hitting multiyear lows, in some cases just above zero. Fundamentally, the ECB is facing the same economic headwinds as the Fed: a slowing global economy and low inflation readings alongside lower inflation expectations.

As a result of this looser stance by the central bank, financing conditions in Europe have generally stabilized after ending 2018 with some volatility and contractions in bond and loan issuance. Italy is still a source of potential political stress, given its budget issues, political situation, and slowing economy. Yet even its yields have fallen over 2019.

The Brexit process remains a source of potential market strain, particularly given the recent victory of Boris Johnson in the run-off for U.K. prime minister. Johnson has stated he will hold to the current Oct. 31 departure date regardless of whether a deal between the European Commission (EC) and the U.K. is reached. In turn, the EC has said that the deal it reached with Theresa May is final and that it will not negotiate a new one. Recently, the British pound has fallen to around $1.22, a low not seen since 1985.

Typically, the U.K. leads corporate bond issuance within Europe, but thus far in 2019, it has slipped behind France. Much of this decline in the U.K. owes to a nearly 25% reduction in issuance among British financial institutions. That said, French corporates are currently highly leveraged, calling into question whether their current pace of issuance is sustainable for much longer.

In all, financing conditions in Europe are currently favorable for most borrowers (see table 6). In the U.S., higher yields are demanded from speculative-grade issuers, but once met, those deals are generally well received. In Europe, it appears that yields on new speculative-grade corporate issues remain generally low, but these deals are being met with more trepidation and a higher percentage that are ultimately underpriced.

Nonetheless, distress in the leveraged loan market remains muted, and most leveraged loans have been covenant-lite for nearly two years. Meanwhile, yields on investment-grade debt have fallen to extraordinarily low levels--to 1.76% for 'A' rated deals, while 'AA' yields averaged only about 0.9% in July.

Table 6

The most recent ECB Bank Lending Survey, released in July, showed that European bank lending standards for loans and credit lines to large enterprises tightened slightly in the second quarter, alongside increasing loan demand. The second quarter's net tightening reading of 0.73 breaks a 21-quarter streak of net loosening for large firms and went opposite of survey participants' expectations.

The accessibility, terms, and conditions on business loans tightened largely due to rising concerns over the economic outlook and increased risk aversion. Looking ahead, banks interviewed for the survey expected lending standards on loans to enterprises to remain unchanged in the third quarter, while demand for business loans is expected to increase.

Corporate bond issuance declines but remains up slightly in the year to date

Corporate bond issuance in Europe contracted in July to just $85 billion, the second-lowest total for any month so far in 2019. However, July has historically been an anemic month for corporate issuance out of the region, in terms of dollar volume. Year-to-date volume has grown to $761 billion, up from a total of $747 billion over the same period in 2018. Financial institutions volume increased 2.4% year over year to $492 billion, while issuance from nonfinancial institutions is up just 1% at $269 billion.

Financial institutions in July originated $57 billion in new volume, the second-lowest total for any month this year. The investment-grade portion of debt from financial institutions contracted significantly, falling to just 48% of volume, the lowest share for any month this year. Conversely, the speculative-grade portion of issuance from financial institutions recorded its strongest month this year, with 12% of total volume. By subsector, banks recorded the highest dollar volume in July, with $22 billion, followed by finance companies and brokers with $14 billion and $12 billion, respectively.

The nonfinancial segment reported its lowest monthly total for new origination so far this year in July, with just $28 billion. Of this total, about 66% was rated investment grade, in line with what we've seen so far in 2019, while the speculative-grade portion of debt fell to one of its lowest levels this year, at 10%. Consumer products led the way with $5 billion in new volume, followed by transportation, high technology, and utilities with about $4 billion each.

Some of this prolonged drop-off is likely a result of the ECB's TLTRO programs that have been in place for the last few years. However, maturing debt totals for European financial institutions have been falling for the past several years as well.

Chart 7

The largest European deal by volume in July was a $4 billion deal from France's Total Capital International at the beginning of the month. The origination consists of four tranches of senior fixed-rate unsecured bonds. The second-largest offering out of Europe in July came from the European Financial Stability Facility, also in the beginning of the month. This deal totaled $3.6 billion and spanned two senior fixed-rate tranches.

Geographical diversity was healthy among the July issuance. Once again, the U.K. led the way in dollar volume, amassing $15 billion, followed by France and Germany with $12.9 billion and $12.2 billion, respectively.

Table 7

Structured finance issuance through July mirrors the 2018 total

Investor-placed European structured finance issuance--including both securitizations and covered bonds--was up across the board in 2018, finishing the year more than 30% higher at about $380 billion. However, issuance dynamics changed significantly in 2019, with an abrupt slowdown in securitization activity but a compensating uptick in covered bond volumes. In the second quarter, securitization issuance recovered but has not made up the ground lost earlier in the year.

Combining both sectors, the net effect has been a nearly identical haul in aggregate issuance year to date, reaching $235.4 billion at the end of July, versus $235 billion at the same point last year (see chart 8). That said, year-over-year comparisons may become less favorable as the second half of the year progresses.

Chart 8

The prospect of normalizing monetary policy may have helped spur covered bond issuance in 2019, leading to year-over-year growth of 14% so far for this subsector. Some issuers returned to the market for the first time in several years, with their borrowings under cheap, crisis-era funding schemes from central banks set to mature from mid-2020.

However, the ECB's early March announcement of a new round of long-term refinancing operations means banks will have a new source of low-cost term funding available to them from September. The terms of the new scheme are not quite as borrower-friendly as for previous incarnations, and some banks may anyway opt to gradually return to debt markets as they plan for the eventual run-off of this official sector term funding. That said, the new scheme will still likely dampen overall covered bond issuance prospects in the second half of the year, and some issuers may already have completed their annual funding plans.

The new central bank funding scheme could also dampen securitization issuance, with a return of bank originators now likely to be postponed or less pronounced. In addition, the likelihood that European policy rates will now stay lower for longer will postpone any positive effect that rising rates could have on investor demand for floating-rate European securitization paper. These more recent negatives for supply add to existing pressures that saw securitization issuance stall in the first quarter of 2019, as lingering uncertainties over a new regulatory regime for European deals--which became effective at the start of the year--led originators to pause. The result has been a decline of 21% in year-over-year volumes.

As well as introducing preferential treatment for "simple, transparent, and standardized" (STS) transactions, the EU's new Securitization Regulation also revamps rules regarding risk retention, investor due diligence, and disclosures, which apply to all securitizations. However, even though the new rules are already in effect, drafts of various technical standards that clarify implementation will not be finalized until late 2019, since they still require signoff by the newly formed European Parliament. The resulting uncertainty, and the threat of significant sanctions for noncompliance, means many originators have been reluctant to come to market until there is greater clarity.

That said, European securitization issuance did recover somewhat in the second quarter as some of the regulatory fog lifted. Uncertainties over eligibility criteria for the STS label have lessened as authorized verification agents have come online, facilitating a common understanding of the requirements.

There are some caveats regarding the scale of European structured finance issuance growth in 2018, as well as in 2019, given exchange rate effects. During the first half of 2018, the euro was significantly up year over year against the U.S. dollar, at times by as much as 15%. With around three-quarters of European structured finance issuance denominated in euros, this helped inflate the 2017-2018 issuance growth rates that we present here, which are based on volumes translated into U.S. dollars at exchange rates prevailing at the time of issuance. However, since early 2018, the euro has broadly weakened and is now about 10% below the highs of early 2018, creating headwinds for our reported dollar-equivalent issuance growth rates through 2019.

Our issuance figures in this report do not include European CLO refinancings and resets, which accounted for about $24 billion in 2018. As in the U.S., we expect wider CLO liability spreads to mean less refinancing and reset activity in 2019, and through July 2019, volumes were down to only $4.1 billion, from about $18.3 billion at this time in 2018.

Emerging Markets Issuance Was Strong In July, Despite Growing Stressors

Offsetting lingering concerns over the effects of the U.S.-China trade standoff, emerging markets got a boost from the Fed and ECB as both central banks decided to hold off on any rate hikes this year, while also slowing or extending elements of their quantitative easing programs from recent years. Lower (or at least not rising) interest rates in developed economies should help put the brakes on their currencies appreciating, and emerging economies could see capital inflows and lower inflation as a result, which should benefit local financing conditions and stimulate bond issuance.

Potentially working against these positive developments, global economic growth expectations for 2019 are slowing as the trade conflict lingers, particularly for the Asia-Pacific region. S&P Global economists in Asia-Pacific have slightly lowered their regional GDP expectations for 2019, to 5.1% from 5.2%. The effect on bond issuance will hinge in great part on how Chinese authorities respond in their deleveraging campaign as Chinese GDP slows this year.

Counter to the U.S. and Europe, bond issuance from all emerging markets reported one of its strongest months of the year in July, with $132 billion in originations, the largest total for any July since 1995. Year-to-date volume for emerging markets now stands at $840 billion, up 23% over the comparable period in 2018, boosted by elevated speculative-grade issuance from both the financial and nonfinancial segments throughout the year. Year-to-date speculative grade issuance is up 51% over the comparable 2018 period, with $42 billion at the end of July.

Financial institutions in emerging markets issued $66 billion in new debt, also the largest total for any July in the past 24 years. Investment-grade originations accounted for just 4% of total volume, while speculative-grade issuance was even less, with about 2%. Nonfinancial institutions originated $65 billion, of which investment grade and speculative grade each accounted for 8% of the total. The homebuilders and real estate subsector issued the most debt of the nonfinancial subsectors, with $16 billion, followed by utilities and transportation with $12 billion and $9 billion, respectively.

The IIF Lending Conditions Survey falls short of a neutral reading

In the first quarter of 2019, the Institute of International Finance (IIF) Lending Conditions Survey for emerging markets improved but still fell short of the neutral reading of 50, reflecting deteriorating lending conditions (see chart 9). This index is a diffusion index, meaning readings below 50 indicate a tightening of bank lending conditions and those above 50 imply loosening conditions.

The overall reading of 49.4 is up from 48.1 in the fourth quarter and was held down only by the poor showing in the Middle East and African region (46.5). Emerging Europe and emerging Asia both broke past 50--albeit by less than one point each--indicating slightly favorable overall lending conditions. For the second quarter, lending conditions are expected to improve into loosening territory, with generalized improvement across all subregions, though not in every aspect.

Chart 9

After widespread restrictive conditions across nearly all emerging market subregions in the past few quarters, the first quarter displayed a roughly 50/50 split between restrictive conditions (in Latin America and the Africa and Middle East region) and looser conditions (in emerging Europe and emerging Asia) (see chart 10). Once again, trade finance remains strong in all emerging subregions (both domestic and international). Conversely, nonperforming loans remain an issue in most regions outside of emerging Asia.

Chart 10

Chinese issuance tops $100 billion in July

Corporate bond issuance out of China rebounded in July to just over $100 billion, the largest total for any July since 1995 and accounting for about 76% of the total from emerging markets. Issuance out of China in every month of 2019 has matched or largely exceeded the same month from 2018 (see chart 11).

Chinese corporate issuance has remained resilient in the face of deteriorating trade negotiations, expanding in the year to date to $602 billion, a 38% increase relative to the comparable 2018 total. Financial institutions issuance has grown tremendously this year, to $352.5 billion through July, a 48% increase. This increase is largely a result of the government's recent lowering of leverage restrictions, in an attempt to spur lending by financial institutions to help boost the economy.

Chart 11

Latin American issuance remains weak as geopolitical challenges mount

S&P Global economists recently reduced their baseline economic forecasts for the Latin America region in 2019 to a contraction of 0.1% (from a prior expansion of 1.3%). Over the last quarter, both external and domestic challenges have grown, most prominently in the form of spillover effects on investment from the U.S.-China trade conflict, as well as deteriorating political situations in Argentina, Brazil, and Mexico.

Further, the economic situation in Venezuela has deteriorated markedly relative to the first quarter. The Venezuelan economy is expected to decline by 20% this year, and this drop is a major factor in the lower Latin American GDP forecast. That said, excluding Venezuela, Latin America is expected to see GDP growth of 1.2% in 2019, though this figure is lower than the prior quarter's 1.9% forecast (excluding Venezuela).

Corporate issuance out of Latin America totaled $6.7 billion in July, one of the highest monthly volumes this year and up 24% from July 2018. However, at $43 billion, year-to-date new-issue volume from Latin America at the end of July was down about 46% from the comparable 2018 total, and marked the lowest total at the end of any July since 2004 (see chart 12).

About 49% of July's volume was rated speculative grade--one of the highest shares so far this year. Financial institutions in July originated about $1.6 billion, about 20% of which was investment grade, while another 45% was speculative grade. Originations from nonfinancial issuers made up over $5 billion of the total, about 50% of which was rated speculative grade, while another 32% was rated investment grade.

Chart 12

The largest issuer out of emerging markets in July was Industrial and Commercial Bank of China Ltd., with the release of an $11.6 billion perpetual state enterprise transaction with a resetting coupon. This is the largest bank perpetual bond issue within China to date. Of the top 15 issuers by dollar volume in July, all but two were located in China. Many emerging market countries outside of China reported a relatively quiet July, leading to the dominance of China-based issuers across the board.

Table 8

International Public Finance

Strong issuance in international public finance continued in July, ending the first seven months 64% ahead of 2018. Asia-Pacific leads the percentage change increase at 91% higher, with Europe up 21% and Canada up less than 2%. China is leading the volume in Asia as local governments respond to Beijing's urging to step up infrastructure spending to counter the impact of the U.S.-China trade war.

Data on non-U.S. public finance volume are not reliable for determining the true size of borrowing, but the numbers can suggest major trends. The past four years have recorded the highest volume ever in international public finance, averaging $552 billion annually. We expect volume in 2019 to surpass the average and reach about $640 billion, which would be an increase of 33% from 2018. We could increase our estimate if the current trend continues.

Other Global Structured Finance

Combining covered bond and securitization volumes, overall structured finance issuance outside the U.S. and Europe posted double-digit growth rates in 2018. Most structured finance issuance activity in these other regions is in Australia, Canada, and Japan. While issuance in Asia-Pacific was up by only 6%, Canadian covered bond volumes surged to $33 billion from only $15 billion a year earlier. Overall, structured finance issuance outside the U.S. and Europe reached $180 billion in 2018, up nearly 20% year over year.

Growth has continued in 2019, with $115.8 billion of issuance outside the U.S. and Europe, up 12% compared with the equivalent period of 2018. Many of the gains have been in the Australian and New Zealand covered bond sector, with several issuers coming to market early in the year, but there has also been strong growth in internationally rated issuance from China.

Our figures exclude Chinese securitization issuance rated only by domestic rating agencies, which has boomed in recent years to almost $300 billion in annual issuance. However, as the Chinese securitization sector develops, the volume of internationally rated issuance is expanding and could grow further in 2019. We anticipate that structured finance issuance outside the U.S. and Europe will continue to grow in 2019.

Related Research

• U.S. Refinancing--$5.2 Trillion Of Rated Corporate Debt Is Scheduled To Mature Through 2024, Aug. 15, 2019
• Global Refinancing--Rated Corporate Debt Due Through 2024 Nears $12 Trillion, July 31, 2019
• Asia-Pacific Quarterly: Weaker Outlook As Trade Tensions Bite, July 9, 2019
• Trade Uncertainty And Domestic Policy Volatility Are Dimming Our Outlook On Latin American Growth, July 2, 2019
• The Eurozone's Open Economy Makes It More Vulnerable To Escalating Trade Conflicts, June 26, 2019
• For The U.S. Expansion, Are Trade Troubles 'Just A Flesh Wound'?, June 25, 2019
• European Refinancing Study--€3.5 Trillion Of Rated Companies' Debt Is Scheduled To Mature By End-2023, Feb. 7, 2019