Perhaps Wall Street analysts spoke too soon when they predicted 2017 would mark the slowdown of an unprecedented boom in corporate credit. Last month, bankers and investors told Bloomberg's Claire Boston that they expected U.S. investment-grade bond sales to finally slow after six consecutive years of unprecedented issuance. But the exact opposite seems to be happening, at least if the first few days of 2017 are any guide. Debt sales are accelerating, with the biggest volumes of issuance ever for the first week of January, according to data compiled by Bloomberg.
And investors are showing as much appetite for the bonds as ever. They poured $2.3 billion into U.S. investment-grade bond funds over the past week, the biggest flow since early October, according to Wells Fargo Securities.
This may just be a blip leading to a gradual slowdown in sales, but there are several reasons 2017 may be another banner year for investment-grade sales: 1) Money has been cheap for years, with the Federal Reserve holding benchmark overnight rates at zero. But that time appears to be ending, for real this time because wages are increasing and inflation is returning. The Fed is planning to raise rates several times this year, and 10-year Treasury yields have been generally rising. So companies may want to lock in the low rates while they can.
Why not borrow money while investors are basically throwing it at you? Average investment-grade yields in the U.S. are 3.7%, compared with a decade-long average of 4.6%.
Ron Quigley, head of fixed-income syndicate at Mischler Financial Group, predicts a big month ahead for January, with up to $160 billion of sales, which would be a record. Others surveyed by Bloomberg are expecting about $112 billion of such debt sales this month, below last year's $134.9 billion in issuance for January, according to data compiled by Bloomberg.
2) Companies are still planning mergers and acquisitions, and they're borrowing money to do so. Even though there are fewer megamergers on the horizon, private equity firms have some big plans. These investors appear determined to put cash to work regardless of the relatively high valuations, according to my fellow Gadfly columnists Brooke Sutherland and Gillian Tan. And some of these companies likely have speculative-grade ratings, giving a boost to potential high-yield bond issuance. There's still clearly demand for such debt, which gained 0.9% in the first three trading days of the year alone, building on last year's 17.5% return. If the debt keeps rallying and yields keep falling, more of these companies will come back to the market.
3) The U.S. economy doesn't appear to be headed for a recession soon, meaning that investors will be more willing to keep lending to corporations. In fact, given the widely held belief that Treasury yields are going to be rising, some investors may prefer corporate bonds to government debt because corporate credit offers a cushion of extra yield to buffer from potential losses. This cushion of extra yield is still above the pre-crisis average.
Of course, the more debt these companies sell, the more pain there is to go around when the credit cycle does finally turn. But for now, the party's still in full swing, with the hangover just a distant prospect.
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