Companies rushed to borrow money from the US corporate bond market in the first week of the year, taking advantage of easier financial conditions as investors reduce their expectations about the path of future interest rates.
In the first seven days of 2023, companies from Credit Suisse to Ford issued $63.7 billion worth of 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 down from the $73.1 billion issued in the first week of January 2022, interest rates have jumped from near zero to a range of 4.25 to 4.5 percent since then. This has dramatically increased the cost of borrowing, with further tightening yet to come Federal Reserve.
Although the cost of borrowing is much higher than it was a year ago, it has fallen since peaking in October as inflation tempered expectations about how long the Fed will have to keep interest rates high.
This is despite the central bank’s insistence that it will keep interest rates high until they reach their inflation target of 2 percent. Treasury yields fell as investors bet interest rates will peak at around 5 percent in June, sending yields higher. Corporate debt Less too.
“If the 10-year Treasury stays at these levels for an extended period of time, you will see more issues coming to market. And it’s not just lower levels, it’s lower volatility. The higher the volatility, the higher the volatility,” said Will Smith, director of high-yield credit at Alliance Bernstein. In prices, say the corporate version.”
Issuance is usually high in January, because demand is lower in December when many investors go on vacation. December was a particularly slow month in 2022 because the holidays were immediately preceded by a high-stakes Fed meeting where the central bank changed the pace of its monetary tightening.
In the December meeting minutes issued this week, Federal Reserve officials He warned, “Unjustified easing in financial conditions, especially if it is driven by a public misunderstanding of the commission’s reactionary function, would complicate the commission’s efforts to restore price stability.”
Several issuers this week, including Société Générale and UBS, initially began to sense interest in early December only to find the market too slow, according to a credit investor who wished to remain anonymous due to the confidential nature of the discussions.
The majority of issuances this week were investment grade, with notable bids from foreign banks with majors in the US and just one high-yielding offering from Ford, which is high on the junk ratings spectrum.
John McClain, high-yield portfolio manager at Brandywine Global, said he has low expectations for more high-yield issuances in the coming weeks, as the size of the upcoming Fed rate hike 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 the waiting game a little bit,” he said.
Corporate yields have fallen more than Treasury yields, with the spread between the two – the premium that investors demand to hold riskier corporate bonds over risk-free Treasuries – narrowing since October. This is usually an indication that investors see a reduction in default risk, suggesting that some have scaled back their expectations for the magnitude of a slowdown in the US economy this year.
“Clearly, the credit market is telling the stock market: We’re not seeing a recession, and if we do see a recession, it’s going to be mild,” said Andy Brenner, head of international fixed income at NatAlliance Securities.
But some investors convinced a recession was about to hit argued that the low premiums companies were paying to borrow were not attractive enough for investors, even in an investment-grade market where the risk of default is much lower.
Of the 34 deals on Wednesday and Thursday, Monica Ericsson was involved in two, said Monica Erickson, head of investment grade credit at DoubleLine Capital, who said.
“Obviously other people buy because deals happen, but we’re very selective in what we buy.”