Corporate debt frenzy rolls on as worries loom over markets
Investors are gearing up for the year’s record-breaking pace of corporate bond issuance to continue in the coming week, even after the U.S. Federal Reserve rattled nerves at its September meeting with a gloomier-than-expected economic outlook.
The past week has seen roughly $42 billion of high-grade debt come to market in 39 deals, most of which were small and offered by first-time issuers.
“I would expect next week to be similar,” said Monica Erickson, portfolio manager, global developed credit, at DoubleLine.
The breakneck pace of fresh issuance illustrates how the Fed’s late March pledge to backstop credit markets and its policy of holding interest rates near zero have spurred borrowing by corporations this year. Companies had already issued $1.7 trillion in debt through the end of August, according to SIFMA, compared with $944 billion in the same period last year.
Demand is likely to stay elevated in the next few weeks, investors said, as historically low rates continue to drive a hunt for yield despite a cluster of economic and political concerns. Those include the Fed’s downbeat economic projections as well as worries over waning fiscal support and potential uncertainty around the U.S. presidential election.
“You have low interest rates, you have tight credit spreads: If I’m an issuer, I’m going to issue as much as humanly possible because it’s cheap debt,” said Nick Maroutsos, head of global bonds at Janus Henderson Investors. “That demand is there because people are craving any sort of return.”
Just over $18 billion in high-yield debt had priced in the week through mid-morning Friday, with two more deals in the pipeline from Aetheon United and PM General Purchaser, according to IFR Refinitiv. IFR’s data showed that Friday’s issuance was expected to drive the year-to-date total over $337 billion, past the previous annual record of $332 billion set in 2012.
Jason Vlosich, head fixed income trader at Brown Advisory, said he expects an additional $40 billion or so in new investment-grade deals through the end of the month. Bank of America in August forecast that this month’s investment-grade issuance was likely to be between $120 billion and $140 billion. September issuance stood at about $115 billion on Friday, according to Refinitiv IFR.
In the coming week, investors will be watching earnings reports from Jefferies Financial Group JEF.N, which is typically seen as a preview of what’s to come from Wall Street banks, Nike NKE.N, cruise line Carnival CCL.N and retailers including Rite Aid RAD.N and Costco COST.O. The economic data calendar is comparatively light, with Markit’s Purchasing Managers’ Index on Wednesday and weekly jobless claims on Thursday.