Corporate borrowers sold investment-grade bonds at the fastest clip since 2020 as companies take advantage of lower yields to issue debt before the November election — even after a market rout Monday briefly froze the market.
Blue-chip firms issued $6.77 billion Tuesday, pushing yearly volume over the $1 trillion mark just eight months into the year. Weak economic data reports last week fueled worries the Federal Reserve has waited too long to cut rates, leading to Monday’s market rout when at least 10 issuers stayed on the sidelines. Just seven companies opted to sell debt Tuesday when the markets were relatively calmer.
The speed and breadth of issuance this year is being driven by two factors: issuers are pouncing on demand from yield-focused investors plowing into the asset class. Finance chiefs are also eager to raise cash before the upcoming presidential election has the potential to inject volatility into the market.
Both Treasury yields and the average cost for blue-chip debt plunged in recent days, creating an additional opportunity for issuers to raise cash at cheaper levels. High-grade bond yields fell to 4.99% on Monday, hovering at the lowest since February 2023 after weak employment data sparked a stampede into Treasuries. The 10-year Treasury yield also dropped below 4% for the first time since February, “a psychological threshold for many issuers,” Barclays Plc strategists Bradley Rogoff and Dominique Toublan wrote in a report Friday.
“If Treasury yields stay low, I think we are going to see issuance move forward even into a volatile market because financing costs are as attractive as they’ve been since early 2022 at this point,” Blair Shwedo, head of fixed income sales and trading at U.S. Bank, said in an interview. “So yes, we’re wider in spreads, but if you’re a borrower looking to lock in all-in costs, this is the best time to do so in over two years if you can get the deal printed.”
Risk Premiums ‘Drift Wider’
To be sure, risk premiums — the amount of extra yield investors demand to hold debt riskier than US Treasuries — have widened 18 basis points to 111 basis points in the past three trading sessions to the highest since November. Spreads ended last year at 99 basis points.
Richard Cheng, an investment-grade portfolio manager at Nuveen, says there is room for spreads to “drift wider” from here. “We came into July thinking that spreads were slightly overvalued, pricing in higher probability of a soft landing,” he said. “A lot of good news was priced into the market. Market participants are now concerned about whether there is a Fed policy error,” he said.
The only time sales surpassed the $1 trillion mark earlier than this year was in May 2020, after the Federal Reserve cut rates to near zero to prop up the economy amid the pandemic.
Issuance has been busy all year with companies borrowing $867 billion in the first half, the second largest haul, according to data compiled by Bloomberg, behind only 2020. July was one of the busiest in seven years with $118.9 billion issued. Volumes in both January and February also set records this year.
Credit markets usually see a decrease in debt sales during the US summer, but the slowdown hasn’t materialized yet. US leveraged loan sales have also reached new seasonal records. In asset-backed securities, deal volume has been trending higher over the summer.
Companies should start issuing debt at a slower pace, but likely not until after the presidential election in November. Dealers were calling for around $95 billion in new bond issuance in August, which would be the most for the month since 2022, while September is historically one of the busiest months for the high-grade primary market.