Companies rushed to borrow from the U.S. corporate bond market, taking advantage of easier financing conditions in the first week of the year as investors lowered expectations about future interest rates.
Companies from Credit Suisse to Ford issued $63.7 billion in U.S. marketable debt in the first seven days of 2023, compared with just $36.6 billion in the last five weeks of 2022, according to data from Dealogic.
While this week’s issuance was down from the $73.1 billion issued in the first week of January 2022, interest rates have since risen to a near-zero range of 4.25 to 4.5 percent. This, combined with yet more tightening from the Federal Reserve, has significantly increased borrowing costs.
While the cost of borrowing is much higher than a year ago, it has fallen since peaking in October as cooling inflation eased expectations about how high the Fed should keep interest rates.
This is despite the central bank’s insistence on raising interest rates until the target inflation rate of 2 percent is reached. Treasury yields fell as investors believed interest rates would reach around 5 percent in June, pushing corporate debt yields lower.
“If 10-year Treasuries stay at these levels for an extended period of time, you will see more issuance coming to market. And it’s not just low levels, it’s low volatility. The more volatility in interest rates, the less corporate issuance,” said Will Smith, director of U.S. high-yield credit at AllianceBernstein.
Issuance is usually high in January as demand is low in December as many investors go on vacation. December 2022 was particularly slow as the high-stakes Fed meeting took place just before the holidays, where the central bank changed the pace of monetary tightening.
In minutes of the December meeting released this week, Fed officials warned that “unwarranted monetary easing, particularly if guided by public misunderstandings of the committee’s response function, will complicate the committee’s efforts to restore price stability.”
This week a number of issuers, including Société Générale and UBS, initially expressed interest in early December only to find an extremely slow market. discussions.
Most of the issuance this week was investment-grade, with notable offers from foreign banks with large U.S. businesses and only one high-yield offer from Ford, which ranks high on the junk ratings spectrum.
John McClain, high-yield portfolio manager at Brandywine Global, said he has low expectations for higher-yield issuance in the coming weeks because the scale of the Fed’s next rate hike at the end of January is unclear.
“High-income borrowers are more sensitive to interest rate hikes, and so if you don’t have to come into the market, you’re probably playing a bit of a waiting game,” he said.
Corporate yields fell more than yields on Treasuries, with the spread between the two — the premium investors demand for holding riskier corporate bonds over risk-free Treasuries — narrowing since October. That’s usually a sign that investors are less at risk of a default, suggesting some are lowering their expectations about the extent of the slowdown in the U.S. economy this year.
“The credit market is clearly telling the equity market: we’re not seeing a recession, and if we do, it’s going to be mild,” said Andy Brenner, head of international fixed income at NatAlliance Securities.
But some investors who believe a recession is looming argue that the low premiums companies pay to borrow aren’t attractive enough to investors, even in an investment-grade market where the risk of default is lower.
“Spreads are very tight for where we are in the economic cycle, so you have to be selective,” said Monica Erickson, head of investment-grade credit at DoubleLine Capital, who said she participated in 34 deals Wednesday and Thursday. at two.
“Obviously, other people buy because the deals are over, but we’re very selective about what we buy.”