Companies Bet Against High for Long in Bond Blitz
“Once we get through this wave, there’s not going to be much remaining supply for the rest of the year.”
Companies storming the bond market at a record-breaking pace made one thing clear: They don’t expect rates to stay elevated for long.
More than $110 billion in bonds sold globally last week, the busiest start to September on record, with issuance heavily skewed to debt due in under 10 years. The barrage was led by investment-grade issuers, teeing up a wave of junk, including billions of dollars in buyout funding.
“Companies don’t really want to lock in these high yields for a very long time if they can avoid it,” said Matt Brill, head of North America investment-grade credit at Invesco Ltd., which manages $1.5 trillion in assets.
Prospects of a soft landing in the United States, and hopes that central banks will soon be able to slow their tightening campaigns, make longer-dated debt more attractive to investors. But companies are instead opting to borrow for shorter periods, hoping the money will get cheaper soon.
“Many issuers are reluctant to lock in these higher absolute rates for the longer term,” said Dan Mead, head of the investment-grade syndicate at Bank of America Corp., the biggest underwriter of corporate bonds according to current Bloomberg rankings.
The share of U.S. high-grade corporate bond issuance with a maturity of 10 years or longer was just 10 percent in the month to September 6, the lowest since at least 2010, according to strategists at Bank of America.
The September rush to raise debt is fairly typical of the corporate bond market, which usually sees issuers take advantage of pent-up demand after a seasonal summer slowdown. It’s not expected to continue at the same pace or to shift credit spreads much from current compressed levels.
“Investors were set up for this,” said Steven Boothe, head of global investment-grade fixed income at T. Rowe Price Group Inc, which manages about $1.4 trillion. “Once we get through this wave, there’s not going to be much remaining supply for the rest of the year.”
Issuance will likely taper after the first two weeks of September as companies enter earnings blackout periods, according to Bank of America’s Mead. “There’s certainly the ability for this market to take on more supply, but I also don’t think we will continue at this run rate,” said Mead in an interview.
The U.S. debt market is already showing some signs of indigestion, with some issuers struggling to generate enough demand to get deals done. Despite this, late last week, September sales already exceeded $55 billion, nearly halfway to the forecasted $120 billion total for the month—with another $30 billion expected this week ahead.
Even so, demand is anticipated to outstrip supply, as the predicted September total would fall short of most prior years, and year-to-date U.S. high-grade sales are down 4 percent. And even after jumping 14 percent this year, global issuance is still running behind 2020 and 2021 levels, data compiled by Bloomberg show.
“Companies don’t want to issue as much, which is going to make life a little harder for the buyers,” said Invesco’s Brill. “There won’t be the concessions that we had kind of hoped for and thought there would be.”
In Europe, debt sales are also expected to slow down later this month. Companies had accelerated issuance to get ahead of central bank meetings and blackouts, according to Tom Moulds, senior portfolio manager at BlueBay Asset Management.
“This seasonal period of activity has been well received,” said Moulds.
—With assistance from Ronan Martin, Taryana Odayar & Andrew Monahan.
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