Companies tap US bond market for nearly $70 billion, starting September on a busy note

Investment-grade corporate borrowers tapped U.S. debt markets for nearly $70 billion so far this week, beating forecasts for the Labor Day-shortened first week of September as borrowing costs remain near record lows.

At least 54 borrowers sold more than $67 billion worth of paper this week as of Friday’s market open, according to market participants. This well outpaced forecasts heading into the week of roughly $60 billion.

Tuesday by far added the most to the week’s primary market tally, with 28 issuers selling $43.3 billion in bonds in what is historically the busiest day of the year for high-grade bond market deal-making.

The Tuesday deal frenzy ranked among the busiest post-Labor Day market opens ever for the high-grade primary market, according to Blair Shwedo, head of investment-grade sales and trading at U.S. Bank in Charlotte, North Carolina.

It was an expected busy day for the calendar, he noted, but surprising in the high number of smaller-sized deals compared to previous such days in recent years.

“The past few (post-Labor Day holiday) days that have been that large had mega-deals,” Shwedo said. “So the diversity there this Tuesday was pretty impressive.”

The largest deal to start the week was U.S. pharmaceutical company Merck’s $6 billion six-part senior note offering, which will help fund its $10 billion buyout of peer Verona Pharma announced on July 9.

The second-biggest bond sale was health insurer Cigna’s $4 billion deal to refinance its soon-maturing term loan and for general corporate purposes.

Spreads on high-grade deals this week, or the premium over U.S. Treasuries paid by U.S. companies for debt, remained near all-time tight levels that have persisted in recent weeks. They last averaged 79 basis points (bps), according to the ICE BofA Corporate Index, having risen from a record-tight 75 bp level hit on August 15.

“From our perspective, deals have been coming pretty tight compared to existing paper,” said Mike Sanders, head of fixed income at Madison, Wisconsin-based asset manager Madison Investments.

Current cheap borrowing costs could cheapen further if the Federal Reserve begins rate cuts at the September 16-17 meeting of the Federal Open Markets Committee.

The U.S. rate futures market has priced in an 88% chance of a 25-bp rate cut by the Fed this month. It has also priced in a 12% chance of a bigger 50-bp cut following data from the Bureau of Labor Statistics showing U.S. nonfarm payrolls rose by an underwhelming 22,000 jobs last month.

“A Fed easing cycle is generally beneficial for corporations and could also help boost economic growth,” said Natalie Trevithick, head of investment-grade credit at Los Angeles-based asset manager Payden & Rygel, in a written note.

“Such an environment could enable spreads on corporate bonds to remain at their currently tight levels for some time to come or possibly even tighten further.”