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ESMA warns of 'substantive' market risks as fixed income issuance falls

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  • The European Commission

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Sovereign and corporate bond issuance fell to pre-crisis and decade-long lows as the European Securities and Markets Authority (ESMA) warned of continued “substantive” risks facing investors.

The regulator’s chairman Steven Maijoor noted that while market stresses had decreased, “key markets and investors” continued to face significant hurdles.

ESMA, in its first market trends, risks and vulnerabilities report for the year, noted that European Union sovereign bond issuance “fell sharply” over the latter half of 2013 – down 33% over the first half of the same year and “well below” the same period in 2012.

Gross issuance of corporate bonds also continued to decline over the course of 2013, with yields for all except AAA-rated bonds falling slightly.

“The yield drop was higher for lower-rated bonds, potentially reflecting a shift in risk assessment and continued search-for-yield behaviour on the part of investors,” the report said.

It also found that the issuance of asset-backed securities (ABS), mortgage-backed securities (MBS) and covered bonds was at an all-time low.

However, the regulator argued that there was no increase in liquidity risk despite the decline in issuance.

However, it added that a heterogeneous pattern to liquidity remained across the market.

“Overall, liquidity-risk developments should be treated with caution, as liquidity-support measures remain in place, and shifts in yield curves could significantly alter liquidity risks,” it said.

It added that market risk stabilised during the third quarter of 2013, despite “mixed” signals.

It also found that credit risk remained largely unchanged, despite the “subdued” issuance.

“Sovereigns and corporates were able to issue debt with longer maturities,” the regulator said.

“As the improvement in conditions relies partly on accommodating monetary policy measures, a rise in the interest rate could eventually trigger an increase in credit risk, especially in vulnerable countries.”

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