It is Decidedly So!
Forget the magic eight ball. May we suggest a better alternative to navigating your way into 2022 – check out Mizuho Americas’ Credit Investor Survey Results.
The Mizuho Fixed Income Syndicate Desk recently conducted a survey of 170 investors regarding their outlook on bond issuance for 2022. Included below are the highlights of the report, as well as a link to the full survey results.
IG Issuance Volume Slowing
The majority of investors (55%) expect IG gross supply to be between $1.2 and <$1.4 trillion in 2022, as they believe the pace of issuance will trend back towards levels seen in 2015 to 2017. Historically, this range is in line with the average over the last 5 years (ex-2020) of $1.29 trillion. Some of these respondents cited they see re-leveraging and buybacks increasing next year.
Nearly a quarter of investors believe the pace of issuance will slow to between $1.1 and <$1.2 trillion, similar to 2018 and 2019, with some citing lower volume given the substantial amount of pre-funding done this year. Only 11% of investors think IG supply will remain elevated and exceed $1.4 trillion.
Credit Spreads Expected to Widen
The ICE BofA U.S. Corporate index recently widened 15 basis points (bps) off the tightest level in the last 10 years (+86 bps on 9/27/2021) to +101 bps as of November 26th, and the bias amongst investors is for IG credit spreads to be unchanged to wider in 2022. Over half of respondents (52%) believe spreads will widen by the end of H1, and that percentage increases to 66% by YE, with some citing rate uncertainty as the driver instead of fundamentals. Nearly 40% of investors believe credit spreads will be unchanged to tighter by the end of H1, but only 29% think we will finish the year in that same context.
Looking at Higher UST Rates in 2022
With the 10yr UST at 1.48% as of November 26th, the overwhelming expectation among investors (91%) is for higher UST rates in 2022. Looking at H1, the bias (86%) is for the 10yr UST to be between 1.50% and <2.00%, but when extending the time horizon to YE, the majority (70%) shifts higher to 1.75% to <2.25%. Coinciding with the expectation that the Fed will start raising rates in 2022, 66% of investors surveyed believe front-end rates will rise more than the long-end and that the shape of the UST curve will flatten next year.
Investors Overweighting Banking and Energy
The sectors the majority of investors are overweight heading into 2022 are Banking (63%), which benefits from a higher rate environment, and Energy (43%), which has benefitted from higher oil prices over the last 12 months. There are several investors taking the opposing view on Energy and are underweight the sector (31%), while other respondents are underweight Technology (34%) and Consumer, Non-cyclical (30%) companies.
Inflation is Top Concern for Investors
Inflation is top of mind for investors with 64% of those surveyed citing it as one of their top concerns heading into 2022. Corresponding with inflation is concern around the timing and pace at which the Fed will hike rates at 38%. These concerns are followed by geopolitical tensions at 37%, COVID-19 at 32% as the new omicron variant threatens economic growth, rising UST rates at 31%, and supply chain disruptions at 28%.
M&A Issuance Staying Level
The bulk of investors (47%) expect M&A related issuance in 2022 to be in line with 2021 in the $150bn to <$200bn range, while 31% see debt-funded M&A activity picking up next year in the context of $200bn to <$250bn. This compares to the average M&A supply of ~$195bn and ~$250bn over the last 3 and 5 years, respectively.
Intermediate Curve to Offer the Most Value
Investors believe the intermediate part of the curve (45%) will offer the most relative value next year amid the expected rising rate environment and anticipated volatility. The spread differential between ‘A’ and ‘BBB’ indices is near the tightest level in the last 10 years, and 38% of investors expect ‘BBB’ credits to outperform in 2022 vs. ‘A’ at 27% and ‘XO’ at 22%.
SOFR is the Preferred Benchmark
In regards to the benchmark for new FRNs or securities with FRN back-ends, investors continue to prefer SOFR (79%) following the retirement of LIBOR compared to other alternatives such as BSBY (11%) and Ameribor (2%). This coincides with FRN issuance in 2021, where 89% of supply used SOFR and 2% referenced BSBY. The bulk of investors (41%) would be willing to buy FRNs with a final maturity date longer than 3 years, while 36% would not participate.
IG Total Return Expected to Remain Level
The majority of investors (46%) expect their IG total return in 2022 to be flat to +2.5%. However, 49% think they will a have a negative total return on the year, which correlates with the bias towards higher UST rates. When asked about current cash balances allocated to IG in 2022 relative to 2021, most are heading into the year unchanged (60%), with the next majority being moderately higher (23%).
ESG Holdings Poised to Increase at Proportionate Levels
Over the next 12-24 months, 56% of accounts will increase their ESG bond holdings. However, this is only in line with market growth or AUM growth. Only 9% of survey respondents said their ESG bond holdings will outpace market growth or AUM growth, while 34% do not expect their ESG bond holdings to increase at all during that timeframe. Investors continue to prefer to invest in the "Green" label. However, margins between various labels are slim: Green (62%), Sustainability (55%), Social (50%), and Sustainability-linked (46%).
The Key Theme of 2022: Volatility
Volatility is expected to be the key theme in 2022. When asked what is the one word that will sum up the bond market environment next year, an overwhelming number of investors answered volatile (31) and challenging (7) with the Fed (5), rates (5), and inflation (4) top of mind.
To review the full analysis of this survey, you can see the report here.