2026 Mid-year Debt Capital Markets Outlook

Announcer: You’re listening to the Scotiabank Market Points podcast. Market Points is designed to provide you with timely insights from Scotiabank Global Banking and Markets’ leaders and experts.

Patrick Dabiet: Welcome to Market Points. I’m Patrick Dabiet, Managing Director and Co-Head of Canadian Debt Capital Markets and Government Finance at Scotiabank. We’re just past the midpoint of 2026, and the debt markets have already delivered another record period of issuance. Today, we’re going to discuss what’s behind it all and what factors could shape the second half of the year.

With me, as always, is Fadi Attia, Managing Director and Head of U.S. Debt Syndication. Fadi, let's get into it. Let’s talk about supply for the first half of the year and what we saw come through in the U.S. market.

Fadi Attia: Things have been exciting to say the very least. We’ve had one of the busiest periods for investment grade during the first half of 2026.

The market has been able to absorb a tremendous amount of supply. To put a number on it, $1.2 trillion for the first half, 30% higher than the same time period last year, and both corporates and financials continue to take advantage of what continues to be a very liquid market.

The supply has taken place despite the, you know, a host of volatility points that has swayed sentiment during that time period. We've had to deal with private credit volatility, tariffs have been front and center, geopolitical tension escalated in a variety of different ways.

And then also the market had to navigate through rising Treasury yields. And all of this has happened whilst the market absorbed the supply and credit spreads for the larger part remained incredibly resilient, which is something that we haven't necessarily seen for quite a bit of time.

PD: A lot of those record-setting metrics that you shared on the U.S. side was a very similar story up here in Canada as well. As you think about what we put up for the first six months of the year, roughly $122 billion, which is actually larger than five of the last ten years in terms of annual volumes, for context.

I think you've seen record maple volumes led by the hyperscalers, and I think that's just the first of many times we're going to be using that term through the course of this recording. But it's really been broad-based in terms of the issuance set. But I think the key points as you raise is the resiliency and how well things have been absorbed.

And your points on the macro environment, the geopolitical tensions, certainly from an inflationary perspective, all of the key political tensions and the look-through to what that's meant in terms of central bank policies, especially up here in Canada, where we have seen the Bank of Canada be a little bit more at the front foot of cutting over the last year. That's changed the dynamic of our rate environment looking forward here as well.

What were some of the drivers you think from a supply perspective, any sectors or specifics that you want to point out?

FA: I think the most obvious driver for this uptick in supply has really been the tech space. You've mentioned the hyperscaler related financing that's coming through from an increasing amount of CapEx that many of these companies need to raise over the next few years.

It's been a huge driver for volumes that we've experienced here in the U.S. dollar market. About $107 billion of new issues have been spoken for by, you know, a variety of these hyperscalers. And I would say that that's one component, and it's interesting in terms of how well the market is able to absorb the supply, partly because it was expected.

Maybe the pace and the, the ability for a lot of the supply to come to the market has been faster than what the market was anticipating. But the fact that, you know, the expectation was there helped absorb much of the supply. But what's more interesting about this, I would say, is the fact that it hasn't really been disruptive.

It hasn't really disrupted other issuers from accessing the market, whether, on the same day or on the follow in terms of the subsequent days as issuers thought about accessing the market. Which is something that, again, speaks to the resilience and the depth of the market here in the U.S.

And I would say the other big driver has been M&A. We've been speaking about M&A in our previous podcasts, and it certainly has not disappointed in terms of the visibility that we continue to see in the credit market in terms of proceeds being raised to fund much of the M&A activity. There's been a pretty remarkable increase in a lot of these financings, and again, similar to what we have seen happen in the hyperscaler space, has a high degree of visibility in terms of coming to the market, and the market has been able to absorb it very efficiently.

And then lastly, what was slightly more surprising I would say, as a component of a volume driver in the U.S., has been how quickly and how large the financing that's just come out of the, the bank space, particularly the money set of banks, as we like to call them here in the U.S., the Big Six banks.

They've been extremely active. And you know, in hindsight, as credit spreads remain close to multigenerational tights, I guess it's not surprising to see many of them front-load and pull forward their financing to take advantage of what continues to be incredibly a competitive cost of funding on a spread basis.

But certainly, surprised in terms of how big and how fast they were able to access the market so far this year. Have you seen similar observations in the Canadian space?

PD: Yeah so, I think from those three kinds of key drivers, I think we kind of hit on two of the three in the sense that hyperscalers being probably the most notable and most material participant from a supply perspective.

And we had some expectation that perhaps the hyperscalers would look to the Canadian market in 2026, but I don't think anyone had necessarily anticipated how well not only the first transaction from Alphabet was going to be received but just how well the second follow-on transaction was going to be received from Amazon, and both of which were record-setting in their own right.

So, Alphabet came through in May of 2026, $8.5 billion worth of CAD proceeds raised. That beat the prior all-time record of $7.15 billion from Coastal GasLink set in 2024. And then only, you know, a few weeks later did we see Amazon come through and ultimately print $14 billion. So, between the two of them, $22.5 billion worth of the $122 billion worth of supply, it's obviously a material component.

And I think to your point, in terms of absorption, I think the market was anticipating to some degree, some of these names looking at the market. I don't think anyone had the expectation that you'd see kind of two hit within the first six months of the year and then two hit within quick succession of one another.

So, I think the market did create capacity for these names to look at the market, and I think for all intents and purposes, I think we’re relatively well received. As you think about the number of discrete investors, there was north of 100 discrete investors on both of these transactions, which from our perspective is north of full participation of the Canadian market.

So not only were we able to attract some international investors to these transactions, but also, I'd say amongst the kind of domestic investor base, you saw effectively everyone, and then some, participating. So that speaks to not only the pure credit investors participating, but we also saw investors who traditionally traffic more so in the government sector also come in and were attracted by the rating and the spread on offer relative to other investable alternatives. So, I think that that's quite notable.

Then to your point on the financial side of things, we also saw the Canadian banks be very well represented in the first six months of the year. So we actually had amongst the busiest period for bank supply, predominantly on the senior side of things, in several years, really since 2022 where I think a lot of the banks were just raising incremental liquidity just based on the kind of COVID period of volatility This was certainly a lot more, I would say, opportunistic supply driven by, I think, a view on market conditions, and then I think ultimately taking an outlook perspective on how conditions may continue to play out down the road from a spread perspective. To your point, we are at, you know, I would say multi-year tights effectively within that range for credit spreads, and I think a lot of the, the banks took a viewpoint on valuations and where, you know, things could be heading longer term, just given the number of geopolitical and macro situations that are currently garnering the market's attention.

So those were the two big drivers. Now, I think the question logically turns to what does the outlook look like for the second half of the year?

What are you looking forward to in terms of the supply outlook for the second half, and what are the key drivers there?

FA: I think the second half will continue to be very active. So, I'm not expecting things to slow down and, yeah, I think you complement that with the fact that we continue to have a significant amount of maturities that are coming due in terms of existing bonds for the remainder of the second half, and certainly for the full year of 2027.

As you think about, the $1.25 trillion of bond maturities, a lot of that is likely to be refinanced and replaced with new securities in our markets. And so not expecting any slowdown in terms of supply. I do think that there are going to be a number of factors that we're probably going to need to navigate through in the second half, whether, you know, an issuer or an investor need to navigate through these dynamics.

And I would say, first and foremost, really the FOMC and the rate environment. We have seen, you know, rates tick up higher in the U.S., treasury rates, and it's been a theme throughout the first half of the year. And it's a big question mark in terms of how that continues going forward. You know, a number of factors have been driving obviously rates in the U.S. dollar market primarily the expectation for inflation to potentially be pressured given the increase in price in commodities and specifically oil price, given the heightened geopolitical sentiment that we continue to operate within. But also, the FOMC now we have a new Fed Chair with Kevin Warsh, policy stance less forward guidance.

I think that's going to probably introduce a little bit more rate volatility just given that approach that the new Fed will take. So, I think we've got to navigate through that and see how that continues to play out and whether or not that's going to have any implication on sentiment.

Certainly, so far in the first half higher rates in the U.S. have definitely helped support tighter spreads. So, for spread funders, it's been an excellent environment. For funders who are exposed to rates and funding themselves on a coupon basis and not hedged, obviously has gotten more expensive.

We also got to navigate through the midterm elections in November and as we pull closer to November here in the U.S. And I do think that that's potentially an event that may not necessarily have any implications whatsoever on the credit markets, but certainly something that the market will navigate through.

I do think the AI CapEx story is going to continue to be very much front and center. You know, we continue to navigate through the earnings season as we speak here. The earnings season, particularly with a lot of focus on CapEx spending and how that will continue to evolve. That's going to be a big driver of not just expectation of supply, but also generally speaking, valuations within that space. Maybe that starts to have implications on other credits. And then obviously general sentiment that's related to it.

And then I would say finally, obviously geopolitical risk is going to continue to be very much front and center during the second half of the year because it doesn't feel like you know, at least as far as the U.S.-Iran conflict is concerned, there's any cemented conclusions there yet in terms of outcomes. And obviously to the extent that we remain in the current status quo, that's likely to sort of flare up volatility every now and then.

So, it feels like there, you know, continuation of a lot of the stuff that we've went through during the first half of the year. But potentially you know, having to navigate through a variety of other factors that are less obvious as we currently sit on our seats.

PD: With the macro points that you raise, you know, I think that there's still, I would suggest that they're starting to have a little bit more of an impact on market sentiment. Your points on the earnings calendar and the focus on, you know, CapEx and how that is ultimately going to get financed is a kind of key component to the investor psychology right now, and I think that that will dictate to a large degree what the direction of spreads through the next several months will be.

I think it's worth noting there were a number of, I would say, longstanding corporate issuers in Canada that have yet to do any funding for the first six months of the year. And so, I think naturally it's going to be interesting to see how some of those names reemerge in the second half in a vastly changed kind of market structure with respect to having, two large hyperscaling complexes now trading in our market.

And I think that's something that has kind of changed the dynamic of the Canadian market. And I think certainly the Maple market beyond the hyperscalers has continued to take large steps forward. And so, it's increased the breadth of issuers, the breadth of sectors that investors have to invest in, and that will now change naturally the dynamic in which investors approach the borrower base that has traditionally dominated the issuance landscape in Canada.

 So that's something that I think is going to be interesting, but I think the, the punchline is there is still more supply. We've revised our supply forecast upward from $150 billion that we were anticipating at the start of the year to $200 billion, which would be the first time that we would have ever seen anything remotely close to that much supply.

I think the good news is there's still embedded a significant cushion from a cash perspective. So, record-setting supply that we've seen this year, the last two years consecutively, has increased the amount of maturities that are going to be naturally flowing back into the market, so cash in the hands of investors.

But ultimately, the higher rate environment that we've been issuing into these record volumes has increased the amount of coupons that are being paid back in the hands of investors, to the point where, you know, investors are now getting almost double the amount of coupon flows from corporates that they were receiving in, let's say, 2022, 2023, for instance.

So that can't be discounted as relates to the cash moat that is helping insulate all the supply. So, I think that's important for market participants to sort of acknowledge going forward.

FA: You raise also a very important point that speaks volumes in terms of explaining why the market has behaved in an exceptionally resilient way here in the U.S. in that, you know, investors have been flush with cash continue to see cash flow into their funds.

And then obviously that cash comes on top of the maturities and the coupon payments they're collecting on existing investments. I do think that that's a big, big driver. What we like to refer to as a technical driver of the market resilience and the tightness of credit spreads that issuers continue to benefit from here in the U.S.

And to put some, you know, numbers on it, you know, so far this year, we've had north of $165 billion of fund inflows. That's a very big number. And then you add that on top of, you know, $260 billion of coupon payments and $550 billion of bond maturities, and this is just during the first half of the year.

You're talking about a trillion dollars, roughly a trillion dollars that was looking to be invested versus $1.2 trillion that got issued during the first half. So, the net supply hasn't really been that significant, even though the numbers look pretty large on paper. If you think about it in the context of net supply, there's only $200 billion of net supply.

And so, I think that's a very important point that you highlight, and I do think that that's going to be a, an important factor to track on a go-forward basis if inflows remain high. We already know the maturities and coupon payments are going to be elevated, as we've just discussed. But to the extent that investor inflows remain pretty high and robust, I do think that that's going to support our markets, and to the extent obviously that that fades for whatever reason, that represents a risk in terms of valuations and potentially sort of a reason for spreads to go wider if supply remains pretty elevated.

PD: It feels like the market has undergone a fairly material transformation, and maybe there's some nuances between the Canadian market and the U.S. market.

But I think from the Canadian market's perspective, the last three to four months has been a material sea change in terms of the complexion of the corporate universe in Canada. And, with the introduction of $8.5 billion from Alphabet, $14 billion from Amazon, it's changed the market structure significantly, I think for the better, for the Canadian investors from a credit rating perspective, from a sector exposure perspective, and from a liquidity perspective, whereby you have material size benchmarks across the curve that investors can now play and have effectively another higher-rated and higher-rated credit with additional spread to interplay with all the various products that are currently outstanding in the Canadian market, whether it be other corporates or even other government-related credit.

So, I think that that's been a positive for our Canadian market. That being said, I think there are also some important changes that I think the market's going to have to grapple with. And as you think about what I said earlier in terms of the participation rate effectively being beyond full participation among the Canadian investors, you now have everyone in the market that's going to not only follow what's happening with their traditional credit stories that they followed, but also what's happening globally and track a little bit more closely what those relative value differentials are looking like, not only in the dollar market, but perhaps other currencies like sterling or euros or swissy.

So I think that that's going to be a nuance and a little bit of a change and require a little bit of a change from the Canadian market as it relates to how they're going to handle some of these changes, and ultimately how the market responds to when there is supply that comes through from these global borrowers that they have exposure to in Canada, and when that happens and hits in other currencies in the market.

So, I think that's going to be interesting dynamic that will likely impact market sentiment, and I think it's important for other borrowers as they're thinking about lining up for the second half of the year to just also be attuned to some of those dynamics at play. But I’m just thinking from the U.S. side, Fadi, what are some of the parallels that you might draw in terms of how the U.S. market has evolved from a structural perspective over the last several months?

FA: Slightly more nuanced in the U.S., and I think, you know, private credit came back into focus earlier in the year and, you know, some interconnection to a lot of the discussion on tech and the need for funding in the tech space, and obviously some of that financing is going through the private credit market.

But certainly, the volatility that picked up in private credit and its impact on the BDCs and the insurance space here in the U.S. has certainly sort of highlighted some risks that maybe the market were not fully pricing in. And to give you a bit of context, in January, just within the BDC space, we had $6 billion of supply just for the month of January, and then after that volatility picked up, the market slowed down over the next three months after that and was only able to absorb $4 billion. And then within that time period, you know, spreads gapped out 60 basis points. That's a very significant move in a market that continues to be lacking liquidity versus your typical investment-grade space.

I do think private credit has come back into focus, and whilst as we sit today much of that has seen a decent amount of recovery. I do think it's an ongoing story that the market will continue to track as we navigate into the second half of the year. And I would say also the other parts that we've seen sort of, get reshaped in our market here in the U.S. is just the evolution of the hybrid capital in a good way.

We've seen new structures appear in hybrid capital in the U.S. We are now seeing issuers access that market with, for example, a thirty-two non-call seven structure, which we haven't seen in previous years in the corporate space. We're seeing issuers go as far out as forty non-call twenty structures.

We are seeing a little bit more diversity in sectors that are accessing hybrid capital in the corporate space. It's not just dominated by utility and energy names, but you're seeing some telecom names, some healthcare names, more insurance names access that space. So, it's good to see that evolution in hybrid capital.

And I do think that the market's, search for optimized capital structures is going to continue to accelerate, and I think that's a benefit. And it gives issuers more tools to be able to enhance their capital structure and obviously gives also investors more product to be able to extract more performance and more alpha on names and sectors that they like.

And I would say the final segment that I do think that we should probably highlight for the U.S. is floating rate notes. That is an area that we're starting to see some fatigue. FRN issuance has slowed down dramatically during the second quarter and we're starting to see books be less deeper in terms of demand in some of those transactions, even for financials, who typically tend to benefit from slightly more robust floating demand in their transactions that complement their fixed offerings.

And so, demand has certainly softened there, and I do think that's at the expense of the fact that the fixed rate alternatives look a little bit more appealing, and it just speaks to the fact to the higher U.S. Treasury curve at the front end that takes away from that floating demand.

So, it'll be something to track on a go-forward basis and whether or not that continues to diminish in demand and becomes less of a segment of the market to raise liquidity.

PD: All right, Fadi. Well, I think we've covered a lot of ground and looking forward to comparing notes when we regroup again in a few months to review and preview 2027.

FA: Thank you, Patrick and see you on the next one.

Announcer: Thanks for listening to Scotiabank Market Points. Be sure to follow the show on your favourite podcast platform. And you can find more thought leading content on our website at gbm.scotiabank.com.

La transcription suivante a été générée à l'aide de la traduction automatique.
 

Présentatrice : Vous écoutez le balado Le point sur les marchés de la Banque Scotia. La série de balados elle vise à vous présenter les perspectives des leaders et experts des Services bancaires et marchés mondiaux de la Banque Scotia.

Présentatrice : Merci d’avoir écouté le balado Le point sur les marchés de la Banque Scotia. N’oubliez pas de suivre l’émission sur votre plateforme de balado préférée. Vous pouvez aussi consulter notre site Web https://www.gbm.scotiabank.com/fr.­html pour d’autres émissions riches en réflexions.