The era of ultra-cheap money is beginning to fade in the corporate bond market

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This content was published on January 24, 2022 – 17:34

(Bloomberg) – Businesses around the world are losing the ability to save more on their borrowing costs as the post-pandemic era of cheap cash fades.

For at least a decade, companies have generally been able to replace maturing bonds with low-coupon debt. While still the case, the spread between existing bond coupons and current yields for the Bloomberg Global Agg Corporate Index, which excludes financial companies, has narrowed to its lowest level since April 2020 as the wave of pandemic-era stimulus is receding.

“As yields rise – and central banks scale back their asset purchase programs – refinancing will inevitably be brought back into the spotlight,” wrote credit strategists at Bank of America Corp. led by Barnaby Martin in a recent note. “While some sectors are still likely to find refinancing beneficial, we believe others are beginning to deplete their refinancing ‘cushion’.”

That spread for non-financial corporate debt globally is now 87 basis points, about half the average spread over the past decade, according to data from the Bloomberg index. Global yields have surged over the past month, with the 10-year US Treasury yield approaching 1.9% last week, a two-year high. Meanwhile, German 10-year yields rose above zero last week for the first time since May 2019.

Greater concern about rising yields is starting to show up in credit markets. A measure of U.S. credit risk, CDX IG, hit its highest level since November 2020 on Monday on high trading volume as investors brace for the Federal Reserve to signal its first rate hike in addition of three years.

According to Bank of America, it is in the real estate sector that concerns about debt sustainability may begin to percolate first. Current yields are now 40 basis points below the sector-weighted coupon, the thinnest cushion of any sector in their analysis of euro-denominated debt.

The move leads to higher emissions as companies seek to lock in borrowing costs before they rise much higher. In the United States, January is already the second busiest month on record for high-quality sales, with a full week to go. Europe’s debt market could see record selling this month, after hitting an all-time high for a single week with $113 billion in the public, financial and corporate sectors.

Real estate companies have been the largest non-financial issuers in the Euro investment grade market so far in 2022. They have raised a total of €12.2 billion ($13.8 billion), or a 64% increase over the same period last year, according to data compiled by Bloomberg.

It’s not just rising rates that drive up financing costs. Credit spreads widened slightly in 2022 and could come under further pressure this year if runaway inflation begins to eat away at corporate margins.

Still, many companies should be able to refinance at lower costs than in the past throughout 2022, said Mahesh Bhimalingam, chief European credit strategist at Bloomberg Intelligence.

The spread between coupons and current yields “will likely narrow further this year, given our expectation of slightly wider spreads and higher yields. But will it drop to 0 bps? Certainly not!” Bhimalingam said. “The secular decline in borrowing costs that has lasted for a decade will continue this year.”

Elsewhere in credit markets:

Americas

The supply of investment grade bonds is expected to moderate this week, after a borrowing campaign in the first three weeks of the month has already made it the second busiest January for sales.

  • Wall Street expects about $20 billion in sales of high-quality bonds, according to an informal survey of debt underwriters. Financial firms have already led the charge on more than $137 billion in bond sales this month
  • Meanwhile, leveraged loan deals take off amid a debt frenzy as Federal Reserve officials gather to brace for a rate hike
  • The cost of protecting Kohl’s Corp. debt. against defaulting on payments for five years skyrockets on Monday after the department store operator confirmed media reports of takeover interest
  • Sculptor Capital Management’s Credit Opportunities Master Fund gained 17% net last year after surging on battered assets in the depths of the pandemic, from mortgages to distressed corporate debt
  • Goldman Sachs economists said they see a risk the Federal Reserve will tighten monetary policy more aggressively this year than the Wall Street bank now anticipates.

EMEA

A record January could be on the cards if this week’s publicly syndicated debt issuance matches the expectations of the most optimistic primary market players, according to a survey conducted by Bloomberg News on Jan. 21.

  • 43% of respondents expect market-wide sales to exceed EU30 billion, led by public sector issuers, up from 87% in the previous week’s survey
  • On Monday, three issuers are expected to price at least 2.5 billion euros of bonds in five tranches
  • The European Central Bank will have to gradually normalize its policy to avoid hurting growth while not acting too late, Banque de France Governor François Villeroy de Galhau told Europe 1 radio.
  • Uniper SE’s credit rating could be negatively affected if the German energy giant continues to encounter volatile energy market conditions that forced the company to borrow billions earlier this month, said S&P Global Ratings.

Asia

Chinese developer Yuzhou Group Holdings Co. said it will not repay the two-dollar bonds due this week, meaning some defaults will occur as builders continue to struggle to repay debts.

  • Guangdong, one of China’s biggest issuers of provincial debt, moved to cut its cost of borrowing as bonds rallied following the central bank’s decision to cut its benchmark rate for the first time in two years
  • Genting Hong Kong chairman and chief executive Lim Kok Thay has resigned, days after the company filed for liquidation of its business in one of the biggest stumbles by a cruise operator since the start of the pandemic

(Updates to include first paragraph global refinancing outlook)

©2022 Bloomberg LP

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