Hot corporate bond market puts buyers on hold

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The peak week of bond issuance is in the books, and high-quality corporate bond trades are holding up amid recession fears and soaring risk-free rates, a trend that looks set to continue until today. the second week of September. It’s a sign that the market remains open for businesses that need it, good news for companies hoping to avoid the risk of a cash crunch. If the United States is ready for a slowdown, it will not be the fault of the bond market.

The week after Labor Day – week 36 – is often the busiest time of the year for suppliers of new corporate bonds, and last week and the change did not disappoint. Investment-grade issuers sold more than $54 billion in bonds last week, led by retailers and financial firms. Walmart Inc., Target Corp. and TD-Dominion Bank were among the active businesses. While it was just average by Labor Day week standards, the result will be a relief in a year that has seen historic declines in the bond market and uneven activity for policyholders. Year-to-date, US investment grade issuance is down about 7% from the previous five-year average, but this important week ended up matching the recent precedent.

Ultimately, it’s a reminder that investors aren’t necessarily the cold-eyed ones despite interest rate uncertainty and growing warnings from economists of a potential recession. On the contrary, the crisis is mainly due to the reluctance of companies to pay market interest rates. The Bloomberg US Corporate Bond Index of investment grade stocks is now showing a yield of around 4.95%, close to the highest since 2009. Companies are also paying higher concessions on new issues, the extra yield that they pay against their existing debt. So far this year, companies have paid 12.7 basis points in those concessions compared to two in 2021, excluding supranational, sovereign and agency debt, according to Bloomberg market strategist Brian Smith. Last week, concessions were 13 basis points.

Generally, companies that have the flexibility are in no rush to pay these rates. If the Federal Reserve is able to engineer the economy’s elusive “soft landing” – if inflation ebbs without too much pain in the labor market – yields could drop significantly. Even if the United States plunges into a recession, corporate borrowing costs could eventually decline amid speculation of Fed rate cuts. Investment-grade credit spreads may simultaneously widen, but perhaps only 75 to 85 basis points at the high end. The situation could even be a marked improvement for issuers.

But many blue chip companies simply have strict funding schedules that they try to meet and don’t bother trying to time the vagaries of the market perfectly. For less frequent issuers, perhaps the main motivation to raise funds is the fear that the future may bring even higher borrowing costs due to persistently high inflation that forces the Fed to become even more aggressive. . Under the nightmare stagflationary scenario, risk-free rates would rise while credit spreads would also widen. Fortunately, few economists have this as a base case. With all these cross-currents, the surge of excitement in the new-issue market is unlikely to last much longer – not at this rate. Bloomberg Intelligence’s chief U.S. credit strategist, Noel Hebert, forecast investment-grade bond sales of $125 billion to $135 billion this month, around the weakest September in seven years. The second week after Labor Day tends to be quite busy, but the momentum quickly fades in the latter part of September. And as Hebert notes, a number of transactions were postponed to August. The size of the current window of opportunity may partly depend on how markets receive the Consumer Price Index report on Tuesday, which should point to further moderation in headline inflation, but is unlikely to be enough. radically change the Fed’s strategy.

For now, the big takeaway is that the primary bond market remains open for business. Investors are getting decent carry at these levels, and they will continue to bring their money into the corporate bond market as long as companies are willing to pay prevailing rates. This should provide a bulwark against a real deterioration in business prospects. So in that sense, Labor Day week was a welcome win for the bond market.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.

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