Riskier euro bonds hit their busiest week since mid‑February. Markets reacted fast to signs the Middle East conflict could ease.

Deal rush: banks and insurers lead the charge

Borrowers who normally steer clear of subordinated debt have suddenly become active. Major financial issuers including Goldman Sachs Group Inc. And Swiss Re AG moved to sell junior-ranked notes this week, pushing overall primary-market activity to levels last seen before the war in the Middle East roiled credit markets.

Goldman Sachs is marketing tier 2 instruments in both euros and sterling that together are likely to total about €2 billion, according to people familiar with the matter. Swiss Re has also tapped tier 2 capacity. Insurance giant Allianz SE went a step further, seeking demand for Restricted Tier 1 paper — the insurance-sector counterpart to banks’ Additional Tier 1 bonds — a sign that big, savvy borrowers judged sentiment good enough to test the market.

Wednesday, in particular, stood out: the region saw its largest number of issuers and distinct tranches in the primary market since January. Sovereigns and corporates joined the move higher up the risk spectrum. Brazil, rated double‑B, returned to the euro market for the first time in more than a decade, while Italy completed a two‑part syndication that raised €17.5 billion, drawing record orders.

Why buyers came back

Sentiment improved quickly after comments hinted that talks on the Middle East might advance. US President Donald Trump said the war with Iran "is close to an end" and hinted at the possibility of a ceasefire extension or renewed discussions soon.

That helped settle investors who had pulled back from riskier assets during the conflict.

Risk metrics that had widened earlier in the year began to pull back. Spreads on European AT1s — a gauge of how much extra yield holders demand for very subordinated bank capital — moved lower in recent trading. The narrowing put a floor under pricing and made it doable for issuers to sell securities that sit low in the repayment order.

Trading desks and syndicates also noticed a currency angle. The euro rallied as hedge funds and other players reduced bearish positions on the common currency, altering the calculus for non‑euro borrowers and international investors who price risk in multiple currencies.

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What the numbers show

Overall volumes this week hit highs not seen since mid‑February. On the subordinated side, indices that track tier 2 and AT1 instruments have tightened from peaks reached during the earlier bout of volatility. For example, a Bloomberg multicurrency index of European AT1s has moved back toward roughly 248 basis points, down from about 300 basis points in late March.

These changes have real impact. Tighter spreads lower borrowing costs for banks and insurers issuing capital instruments, and they change the set of deals that bankers can price. That helped coax a cluster of deals onto syndication books all at once — a virtuous circle: more issuance increases choice for investors and creates the impression of a liquid market willing to absorb subordinated paper.

There were also big sovereign and corporate flows. The single‑day issuance numbers have been eye‑watering recently, a continuation of a trend seen through the first half of the year, when euro market supply surged as borrowers sought to lock in funding while investor demand remained strong.

Investor appetite and who took the risk

Buyers ranged from traditional fixed‑income funds to dedicated credit accounts hunting yield. The search for higher returns has pushed more money into lower-ranked debt — areas that offer bigger coupons but also carry greater chance of loss in bad scenarios. Syndicate teams said orders often covered bookrunners’ offers multiple times over, letting arrangers tighten initial pricing.

That said, underwriting subordinated instruments isn't a routine trade for all investors. Many funds specialising in bank capital and insurance debt returned to the market first because they're structured to hold such instruments. Others, drawn by spreads that had become more attractive compared with senior public debt, took selective positions. In short, demand was strong enough to push large, complex deals through fast.

Risks that linger

The calm might not last long. The earlier shock from the Middle East conflict showed how fast credit conditions can reverse. Private credit stresses, potential policy errors, or renewed geopolitical flare‑ups would be enough to push spreads wider again. And subordinated instruments are sensitive to headline risk: a single surprise can force investors to re‑price volatility into all corners of the capital stack.

Issuers know that. Many timed their sales to test the market while funding windows were open. Those issuers that succeeded — including names such as Goldman Sachs and Allianz — will take comfort from strong order books. But those that waited and still need to raise capital might find a narrower window if risk sentiment shifts back the other way.

Broader market implications

This affects corporate borrowers, banks, and sovereigns alike. Tighter pricing for subordinated paper can relieve some refinancing pressure for financial groups that depend on these instruments to meet regulatory capital ratios. And when appetite exists for higher‑risk, higher‑yield debt, it often loosens conditions elsewhere in credit markets — enabling corporates with lower ratings to access funding more cheaply than when spreads spike.

At the same time, higher issuance increases supply; markets will inevitably need to digest more paper over coming weeks. That will test whether demand remains steady or softens as investors pick spots. If demand stays strong, the recent flurry of deals could move from a headline event into a normalised flow of activity for the summer.

What market professionals are saying

Laurent Frings, head of European credit research at Aegon Asset Management, said recent improvement in market mood has encouraged issuers to come forward with a greater volume of new deals. He described credit markets as demonstrating resilience amid competing risks — from geopolitical tensions to shifts in private lending and rapid technological change.

Meanwhile, US President Donald Trump’s comments about progress toward an end to hostilities in the Middle East were credited with shifting investor psychology over a short span. Traders and portfolio managers cited his remarks when explaining the rapid move back into higher‑risk paper.

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Spreads on a Bloomberg multicurrency index of European AT1s have narrowed to about 248 basis points, near pre‑war levels.

This article was created with AI assistance.