FIs set to march on after investors succumb to juicy carry of bumper January offerings

Financial institutions exiting blackouts are set to find the market ripe for issuance, after investors swallowed a glut of January deals, in spite of FIs testing a new pricing paradigm and geopolitical risks taking on new dimensions, although uncertainty remains, with the added potential impact of corporate supply to support huge AI investments. Neil Day reports, with insights from Crédit Agricole CIB.

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Abundant liquidity and attractive yields for investors combined to offer financial institutions prime conditions for new issuance in January, and they duly delivered, with the resilient market proving able to absorb not just heaving supply but also the latest geopolitical headlines.

The primary market quickly picked up where it left off approaching year-end, albeit buoyed by higher rates, following the back-up through November into December.

“The liquidity-carry combo is front and centre when it comes to the momentum of the market and spreads,” said Vincent Hoarau, global head of FIG syndicate at Crédit Agricole CIB, which has enjoyed its strongest start to a year at the heart of primary supply. “We have seen compression across jurisdictions and the capital structure, spurring a surge in Tier 2 alongside rare AT1s.

“More and more euro investors are looking at Tier 2 and SNP securities on a yield basis and the 4% mark feels like a magic number, at times regardless of the level of subordination,” he added. “At the same time, in covered bonds, 3% is a coupon for triple-A paper that the buy-side just doesn’t want to miss, particularly when unsecured spreads are so compressed.”

Duration has commensurately been in vogue, as exemplified by Deutsche Bank on 8 January, when it attracted some €7bn of orders to a €1bn 15.3 non-call 10.3 Tier 2 transaction that was the first public euro Tier 2 issue from a European bank with a 15 non-call 10 structure since 2008. The German bank’s first euro Tier 2 issue in almost four years also achieved its tightest ever pricing for a public euro Tier 2 transaction, following a necessary price discovery process and discussion over the fives to 10s curve.

Similarly, at the tight end of the FIG spectrum a rich vein of long-dated covered bonds was capped by a 15 year benchmark for Deutsche Kreditbank on Tuesday, upsized to €1bn as its 3.5% coupon proved tempting for many accounts.

Perhaps inevitably, the market’s biggest tests in January came from US president Donald Trump. Markets swung into risk-off mode after his Saturday, 17 January threat of tariffs against European countries resisting the US’s desire to acquire Greenland, with the iTraxx Crossover widening significantly and issuers retreating to the sidelines, before a quick pullback from the brink, following discussions in Davos on Wednesday, 21 January, saw a powerful relief rally.

“Trump’s softer stance, ruling out military force and announcing a NATO framework, triggered an immediate reversal,” said Cécile Montfort, global head of FIG DCM at Crédit Agricole CIB (pictured). “Thursday then delivered the week’s strongest session, with eight issuers rushing to capitalise on renewed appetite.”

Montfort agreed that, beyond the geopolitical headlines, deeper structural dynamics are behind the market’s resilience.

“Performance is fundamentally driven by technical factors,” she said, “abundant liquidity, with rebalancing flows from equity, gold, and commodities supporting fixed income demand. Bank and insurance fundamentals remain solid: strong balance sheets, robust liquidity profiles, and manageable cost of risk offset by efficiency gains.

“Yet these fundamentals alone don’t justify the material spread tightening observed in 2025. With asymmetric risk — higher probability toward widening rather than further compression in 2026 — issuers seized the favourable January window to advance their funding programmes.”

Overall euro financial institutions supply last month was up 11% on January 2025, rising from €73.65bn to €81.55bn, with a 32% surge in benchmark covered bond issuance, from €21.6bn to €28.5bn, driving the increase.

“We have enjoyed a very supportive environment in the asset class, with exuberant moves from guidance and eye-watering order books at the start of the year, before normalising towards late 2025 levels,” said Matthew McFarlane, FIG syndicate, Crédit Agricole CIB. “Investor appetite has been driven by excess cash and the level of total returns covered bonds are offering for a triple-A product, with an increased number of credit investors involved, including hedge funds.

“We have hence seen spread compression and tested a new pricing paradigm, with the differential between Bund and covered bond yields trading at long time lows.”

Unsecured volumes finished the month roughly in line with 2025 and the average over the past three years, with senior preferred/OpCo issuance down 18% on last year, but investors’ willingness to take down higher beta instruments helping supply of SNP/HoldCo paper increase 8%, Tier 2 16%, and Tier 1 63%.

The dollar market proved even stronger, with US bank issuance in January the highest ever single month’s supply, at $52.5bn. This was also within the context of overall investment grade supply that beat expectations to come in at $222bn, the most ever in the first month of the year, and the fifth highest of any month. The IG index meanwhile closed the month at 74, 7 tighter than at the start of the year and matching the lowest level seen across 2025.

Connor Prochnow, US debt syndicate at Crédit Agricole CIB, reflected the focus on technicals and fundamentals.

“Inflows have started the year very strongly,” he said. “Thursday’s number was the biggest since 2021.

“And against a backdrop where concerns — the few that there are — are more focused on the tech space, with the AI narrative, the fundamentals of banks are strong. They’re extremely well capitalised and in a solid position, and that keeps them in a really well-supported position — both US and Yankee banks.”

The bank supply included $16bn (€13.5bn) from a single record-breaking Goldman Sachs deal, split into six tranches ranging from three to 21 years, on 14 January, with the big six banks overall more active than ever. While investors may have proven particularly accommodating to such volumes, supply-side drivers contributed to the peak, too, with Goldman and Morgan Stanley, for example, looking to fund buoyant capital markets businesses, and Wells Fargo growth following the lifting of its asset cap last year. Goldman Sachs, Morgan Stanley and JP Morgan meanwhile saw opportunities to optimise their capital in subordinated trades.

“Replacing Tier 1 with Tier 2 is a theme among US banks,” said Prochnow. “A lot of them have an excess of CET1 capital, and as their preferred shares come off, they’re replacing them with cheaper Tier 2.”

Something for everyone

The primary market was quieter in the second half of the month, mainly due to blackouts. However, the absence of bigger players allowed smaller to medium-sized banks to steal the limelight.

“It has offered them a great opportunity to come to the market, issue at very attractive levels, and get very good demand, too,” said Neel Shah, financial credit analyst at Crédit Agricole CIB. “Clients are having to put cash to work, and that has benefited these medium to small-sized banks in the past couple of weeks.

“We’ve seen a lot of Tier 2s from Italian, Spanish and Greek banks at levels that, if you go back one year, would have been unheard of, with pricing at or inside fair value, and close to the national champions.”

Foremost among this supply was a €400m 11.25 non-call 6.25 Tier 2 for Greece’s Eurobank on 22 January. The bond, rated Ba1, attracted over €3.8bn of orders, allowing pricing to be tightened from initial price thoughts of the mid-swaps plus 200bp area, through guidance of the 170bp area, to a re-offer of 160bp.

Such supply came on the back of bumper Tier 2s for bigger names — as well as Deutsche’s aforementioned landmark, BPCE, for example, attracted as much as €9.4bn of demand to a €750m 11 non-call 6 at least 10bp inside fair value.

“Issuers are achieving very competitive pricing in Tier 2,” said Hoarau (pictured), “with the SNP-Tier 2 spread differential at a record low and callable Tier 2 levels at Covid lows.

“Investors are hardly being compensated for the subordination element and having to buy at spreads they would rather pass on,” he added. “Sitting on cash is very costly and being short FI credit very tricky.”

After UniCredit kicked off 2026 AT1 issuance with a €1bn perpetual non-call five trade on 12 January, Raiffeisen Bank International (RBI) hit the market the following day, selling a €650m perpetual non-call 6.9 deal in conjunction with a tender for a €500m 6% issue coming up for call in June.

Insurers joined in the New Year bonanza, with Groupama and Unipol selling RT1 issues of €600m and €1bn, respectively, while €650m Generali and €750m Crédit Agricole Assurance Tier 2 deals were followed up by an inaugural trade for France’s Carac. The debutant on Wednesday sold a €300m 20 non-call 10 Tier 2, rated BBB+, 40bp inside IPTs at 160bp over mid-swaps on the back of some €5.9bn of orders.

Conditions for financial institutions are expected to remain healthy as they exit blackouts and supply picks up.

“The market feels very well supported right now,” said William Rabicano, director, credit trading at Crédit Agricole CIB. “With supply increasing again, there could be a bit more saturation in the market, and I don’t think we can continue squeezing much tighter, because levels do look optically quite stretched, and with all these geopolitical noises, we are seeing decent two-way flows.

“But there’s definitely still cash to put to work and I would expect issuance to still be well received unless something significant happens.”

Indeed, looking ahead to the coming weeks and months, Crédit Agricole CIB’s FIG team maintains a constructive outlook on spread evolution for financial institutions.

“While there appears to be limited room for further compression across the capital stack, the technical support for bank funding instruments remains exceptionally strong,” said Hoarau. “Expecting relatively few euro AT1 instruments in the first half of 2026, we anticipate negative net supply in Tier 2, with bank liquidity funding volumes remaining fully manageable.

“This situation is likely to persist until issuers begin pre-funding the upcoming wave of redemptions in 2027.”

Currently, excess liquidity prevails as inflows in euro credit funds continue and central banks, mainly the Fed, remain rather accommodative.

“Today, the world debates the potential for an AI-related market bubble, with two important questions being, the magnitude of hyper-scaler funding needs investors will have to absorb in the coming months, and its possible impact on spreads for banks,” said Hoarau.

“Markets are anticipating higher interest rates and steeper yield curves, particularly as the Bank of Japan confirms the end of the carry trade,” he added. “However, we cannot dismiss the risk of economic growth setbacks in Germany and France in the near term. A less hawkish stance from Christine Lagarde and a pivot from the ECB could further support tight spreads to German Bunds.

“In the short term, the dramatic decline in commodity prices and certain stocks serves as a reminder of some fragilities in the market. A conflict with Iran would amplify this week’s decompression — healthy before spread performance can resume after a fast and furious month of January.”