Companies rush to tap US bond market as credit conditions ease

Companies rush to tap US bond market as credit conditions ease

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Companies rushed to borrow money in the US corporate bond market during the first week of the year, benefiting from more favorable financing conditions, as investors scaled back their expectations for future interest rate developments.

In the first seven days of 2023, companies from Credit Suisse to Ford issued $63.7 billion in US-marketed debt, according to data from Dealogic, compared to a total of $36.6 billion in the last five weeks of 2022.

While this week’s issuance is lower than the $73.1 billion issued in the first week of January 2022, interest rates have since risen from near zero to a range of 4.25 to 4.5 percent. This has significantly increased the cost of borrowing, with more tightening to come from the Federal Reserve.

Although the cost of borrowing is far higher than it was a year ago, it has fallen since its October peak as easing inflation has dampened expectations of how long the Fed will need to keep interest rates high.

This is despite the central bank’s insistence on keeping interest rates high until it reaches its target inflation rate of 2 percent. Government bond yields have fallen as investors bet interest rates will peak in June at around 5 percent, which is also pushing corporate bond yields lower.

“If the 10-year Treasury bond stays at this level for a longer period of time, you will see more issuance entering the market. And it’s not just a lower level, it’s lower volatility. The more volatility interest rates have, the less corporate issuance,” said Will Smith, director of US high yield at AllianceBernstein.

$Bn column chart showing corporate bond issuance for the first 7 days of January

Issuance tends to be high in January as demand is lower in December as many investors go on holiday. December 2022 was particularly slow as the holiday was immediately preceded by a high-stakes Fed meeting where the central bank changed the pace of its monetary tightening.

In minutes of the December meeting released this week, Fed officials warned that “unwarranted easing of financial conditions, particularly if driven by a misperceived public perception of the committee’s responsiveness function, would complicate the committee’s efforts to restore price stability “.

Some of this week’s issuers, including Société Générale and UBS, had initially begun to feel interest in early December, only to find an extremely slow market, according to a credit investor who wished to remain anonymous for the confidentiality of the discussions.

The bulk of issuance this week was investment grade, with notable bids from foreign banks with large companies in the US and only one high yield bid from Ford, which ranks high on the junk rating spectrum.

The Goldman Sachs Index of US Financial Conditions line chart shows that US financial conditions have eased slightly since the October peak

John McClain, a high-yield portfolio manager at Brandywine Global, said he had low expectations for more high-yield issuance in the coming weeks as the magnitude of the Fed’s next rate hike in late January was unclear.

“High-yield borrowers are more sensitive to rate hikes, so if you don’t have to go to the market, you’re probably playing a little wait and see,” he said.

Corporate yields have fallen further than those on Treasuries, with the spread between the two — the premium investors demand to hold riskier corporate bonds versus risk-free Treasuries — also narrowing since October. This is usually an indication that investors see less risk of default, suggesting that some have lowered their expectations for the extent of the US economy’s slowdown this year.

“The credit market is clearly telling the stock market: we don’t see a recession and if we do, it will be a mild one,” said Andy Brenner, head of international fixed income at NatAlliance Securities.

However, some investors, convinced that a recession is imminent, have argued that the lower premiums companies are paying to borrow are not enticing enough for investors, even in the investment-grade market, where the risk of default is much lower.

“Spreads are very tight for our current economic cycles, so you have to be selective,” said Monica Erickson, head of investment-grade credit at DoubleLine Capital, who said she participated in the 34 deals Wednesday and Thursday in two.

“Obviously other people are buying because the deals are closing, but we’re very selective about what we buy.”

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