What's attracted record $2.8T into European bonds so far in 2024?

Investors have put in a record €2.6 trillion ($2.8 trillion) of orders for new bond sales in Europe so far this year, outbidding the debt on offer by the most ever.

Total orders have reached more than five times the record €507 billion of issuance in Europe’s syndicated primary market in the first two months of 2024, according to data compiled by Bloomberg. That’s higher than any subscription ratio covering similar amounts and periods since at least 2018, when Bloomberg first started collating the data.

Cash-rich investors are piling into corporate and public-sector debt sales to snap up yields that have picked up in recent weeks back toward the decade-highs seen last year. Hedge funds in particular are scooping up new securities paying a decent premium over government bonds, before the onset of global rate cuts is expected to drive down yields.

“Money needs to be put to work, yields are optically high,” said Gordon Shannon, a portfolio manager at TwentyFour Asset Management. While corporate spreads “aren’t cheap,” buying government debt “solves the problem with less downside.”

The biggest demand has been for the debt of high-rated sovereigns, supranationals and agencies, or SSAs. For example, combined bids for a two-tranche European Union sale in late January hit 27 times the deal’s size, the most ever in data compiled by Bloomberg. Fund managers accounted for 28% of the orders on one of the tranches, the highest share.

Average yields on high-grade, euro-currency corporate debt have crept higher in recent weeks to above 3.8%, more than double the five-year average, Bloomberg index data show. On a spread basis, euro corporate notes are currently beating out equivalent dollar-denominated debt, which could also be spurring inflows into Europe’s credit funds.

“Both high-grade and high-yield funds have been recording strong inflows over the past three/four months on the back of lower “risk-free” rates and the expectation that rate cuts will be sizable,” Bank of America Corp. strategists including Ioannis Angelakis wrote in a Feb. 23 note. “We think that in a world of lower yields across the fixed income world, we will see a structural demand for credit.”

Issuance so far this year has been rapid, with Europe breaking through €500 billion equivalent of euro, sterling and dollar Reg S sales on Tuesday. That’s more than a week earlier than in 2023, the previous record, when the milestone was reached on March 6, Bloomberg data show.

It’s a similar picture in the US, which just set a February record with $172 billion of blue-chip corporate debt sales as companies seized on lower borrowing costs.