Companies rushed to borrow money in the U.S. corporate bond market in the first week of the year, taking advantage of easier financial conditions as investors lowered their expectations of future developments. future interest rates.
In the first seven days of 2023, firms from Credit Suisse to Ford issued $63.7 billion of marketed debt in the United States, according to Dealogic data, compared to a total of $36.6 billion in the during 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 moved from near zero to a range of 4.25-4.5% since then. . This has significantly increased the cost of borrowing, with further tightening on the part of the Federal Reserve.
Although the cost of borrowing is much higher than it was a year ago, it has come down since the peak in October as slowing inflation dampened expectations about how long the Fed will have to keep interest rates high.
This is despite the central bank’s insistence on keeping interest rates high until it hits its inflation rate target of 2%. Treasury yields have fallen as investors bet interest rates will peak at around 5% in June, driving yields corporate debt lower too.
“If the 10-year Treasury stays at these levels for an extended period of time, you will see more issues coming into the market. And it’s not just lower levels, it’s lower volatility. more volatility in rates, the less corporate issues there are,” said Will Smith, director of US high-yield credit at AllianceBernstein.
Issuance is generally high in January, as demand is weaker in December as many investors go on vacation. December was particularly slow in 2022 as the holidays were immediately preceded by a high-stakes Fed meeting in which the central bank changed the pace of its monetary tightening.
In the minutes of its December meeting published this week, Fed officials warned that “an unwarranted easing of financial conditions, particularly if driven by a public misperception of the committee’s reaction function, would complicate the committee’s efforts to restore price stability.”
Several issuers this week, including Societe Generale and UBS, initially lost interest in early December only to find an extremely slow market, according to a credit investor who wished to remain anonymous due to the confidential nature of the discussions.
The majority of issues this week were investment grade, with notable offers from foreign banks having large companies in the United States and a single high-yielding offer from Ford, which tops the junk rating spectrum.
John McClain, high-yield portfolio manager at Brandywine Global, said he had low expectations for more high-yield issues in the coming weeks as the scale of the next interest rate hike from the Fed at the end of January is unclear.
“High-yield borrowers are more sensitive to interest rate increases, and so if you don’t have to come into the market, you’re probably playing a little bit of a wait,” he said.
Corporate yields have fallen more than those of Treasures, with the difference between the two – the premium investors demand to hold riskier corporate bonds relative to risk-free Treasures – also narrowing since October. This generally indicates that investors are seeing a lower risk of default, suggesting that some have lowered their expectations for the extent of the slowdown in the US economy this year.
“The credit market is saying clearly to the equity market: we don’t see a recession, and if we do see one, it will be moderate,” said Andy Brenner, head of international fixed income at NatAlliance Securities.
But some investors confident that a recession is approaching argued that the lower premiums companies were paying to borrow were not attractive enough for investors, even in the market for quality securities where the risk of default is much 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 that of the 34 trades in Wednesday and Thursday, she participated in two.
“Obviously other people are buying because the deals are done, but we’re very selective about what we buy.”
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