Large US companies have been on a bond issuance binge but this rapid pace in supply may be hard to sustain ahead of expected volatility related to extending the US debt ceiling and another possible move higher in interest rates.
Investment-grade rated companies issued $152 billion in May, making it the busiest May since 2020 when the pandemic crisis prompted record debt issuance volumes, according to data from Informa Global Markets. Junk-rated companies meanwhile raised $22.1 billion, for the busiest May since 2021 when 73 companies raised $49.1 billion.
“I believe we have seen an acceleration of issuance into May,” said Richard Wolff, head of US bond syndicate at SG CIB, saying this was a result of debt issuance being pulled forward.
“So the ensuing months should see a slight moderation of supply,” Wolff added.
This debt issuance spree is on the back of strong demand for what were relatively higher yielding corporate bonds after Treasury yields rose in May from levels touched in late April.
New investment-grade bonds in May received orders that were three to four times the offering size on average, according to IGM data.
Junk bonds also got decent demand as yields at just under 9 per cent were “historically really attractive levels we haven’t seen for years outside of the pandemic or the energy crisis before that,” said Manuel Hayes, senior portfolio manager at London-based asset manager Insight Investment.
“It’s an attractive income source considering bonds are being issued primarily by companies rated in the upper bands of junk so had a lower probability of default,” he added.
CHANGING TIDE
The debt binge, however, gave a broad hint that the largest companies in the world are not optimistic on borrowing conditions later in the year.
Near-term funding costs are likely to spike due to a drain on liquidity – the Treasury is expected to issue nearly $1.1 trillion in new Treasury bills (T-bills) over the next seven months, according to recent JPMorgan estimates, to replenish its coffers.
Spreads charged on corporate bonds as a premium over Treasuries or credit spreads (.MERC0A0), (.MERH0A0) which have been stable so far are expected to widen, adding to funding costs for prospective borrowers.
“It’s more likely credit spreads widen from here given the macro concerns of the debt ceiling and resultant near-term large T-bill issuance, Fed tightening to dampen inflation, and geopolitical risks,” said Jessica Lehmann, head of investment-grade and emerging markets syndicate at HSBC.
Fed funds futures traders now see the Fed as more likely to hike interest rates this month than leave them unchanged, as economic data beats expectations and lawmakers appear to have reached a deal to raise the debt ceiling.
“I could foresee liquidity becoming an issue even if the debt ceiling negotiations come to a resolution, particularly if ratings agencies continue to sour on how the situations and negotiations were handled,” said Blair Shwedo, head of investment-grade trading at US Bank.
Despite what appears to be a strong new issue backdrop, “there is credit sensitivity and a higher bar for less familiar, less liquid issuers,” said Jiyann Daemi, director, US IG syndicate at TD Securities. He added that this bar “might continue to move higher, should there be further market dislocation.”