Debt Revival a Major Surprise of H1

One of the surprising developments in the H1 2009 has been explosion of debt issuance, outside of the sovereign sector. The $345 billion of high grade issuance in Europe, for example, surpasses full year records. Globally, the financial sector issued about $730 billion of debt while the non-financial sector issued about $886 billion, according to industry reports. Moreover, the recent trend has been toward lower coupons and heavy interest. Financial issuance was helped by the fact that a number of countries guaranteed bank bonds. In Q1 0209, nearly 805 of the bank bonds issued were guaranteed, but in Q2 it fell to 50% and looks to slip further in Q3. The financial issuance was also bloated by banks switching to less expensive debt. Bond issuance was also boosted by the impairment of banks.

It is not just the investment grade bond market that re-opened. the high yield bond market also saw renewed interest. Risk premiums fell and issuance in Q2 was around $48.3 billion, nearly 4x larger than the Q1 pace.

Convertible bonds, which allows debt to be turned into equity also enjoyed a mini-boom. Like the high yield bond market, activity in the convertible space quadrupled in Q2 over Q1. US convertible issuance was almost $16 bln compared with $6.1 bln in H1 08. European convertible issuance was a little more than $10 bln, vs almost $2 bln in H1 08.

Flows into US-based bond funds have been positive every month this year. Industry reports suggest inflows into bond funds has outstripped equity fund intakes this year.

Global equity issuance in H1 09 has been a more mild $220 bln, mostly rights issue and other secondary capital raising. IPOs, largely concentrated in Asia, raided a little less than $7 bln. The pace picked up in Q2 and the outlook appears to be improving. Note the separately, some reports indicate that US insiders (corp executives) have been selling shares more aggressively than any time in the past two years, selling for 14 consecutive weeks through mid-June.