Bracing for a Slowdown in Blue-Chip Bond Binge

Bank of America Corp.’s (BofA’s) Dan Mead expects U.S. blue-chip bond market activity to slow down through the end of this year, after borrowers gorged on debt in the first half, enticed by attractive yields now and avoiding election volatility later.

“The overriding theme we expect is for supply to be quieter,” said Mead, who is head of U.S. investment-grade syndicate at the bank. So far this year, his team has overseen about $78.4 billion of high-grade bond issuance including self-led transactions, making BofA the third-biggest underwriter in the market, according to Bloomberg league tables. Excluding self-led deals, the lender is the top underwriter for high-grade bonds.

Mead spoke with Bloomberg News on June 11. Below are highlights of the conversation, condensed and edited for clarity.

Bloomberg News:  The U.S. investment-grade bond market has been on fire this year. What has stood out to you?

Dan Mead:  The main takeaway is how resilient the demand for investment-grade bonds has remained, despite these very heavy volumes that we’ve witnessed since the beginning of the year.

There have been some brief periods of indigestion. We’ve had a series of days when there have been very large volumes going through the market, where we’ve seen a modest pullback from investors on the back of that supply, which has led to some spread widening.

But in every case this year, that spread widening has lasted only a handful of days and was quickly met by buying.

Bloomberg:  What should we expect in terms of issuance and demand as we get closer to the November elections?

DM:  The overriding theme we expect is for supply to be quieter. Certainly quieter than what we’ve witnessed so far this year.

We’ve seen borrowers front-loading their issuance needs for 2024, largely into the first quarter of this year. We had a surprisingly very busy first quarter both on the corporate and financial side. That’s presumably going to result in a much quieter second half.

Many of these issuers have taken advantage of very strong conditions to pull forward their financing needs as well as just de-risking and getting ahead of any potential volatility later in the year that could be created from certain risk factors, including the elections, geopolitical, and macroeconomic events.

Bloomberg:  If the Federal Reserve cuts interest rates by September, do you think we might see more issuance than people expect?

DM:  I wouldn’t necessarily tie it specifically to a rate cut, but I would think of it more around what term rates—or longer-term treasury yields—do. If we were to see a significantly lower-yield environment in the treasury market, which perhaps may be a function of a rate cut or other catalysts, we could see a pickup in supply where issuers are taking another bite at the apple and taking advantage of both an attractive credit spread environment as well as lower yields.

Issuance in the first half of the year is typically higher than in the second half. On average, first-half issuance ranges from 55 percent to 60 percent of the overall supply on any given year, and we’re currently running at a higher rate than that. We’re probably closer to plus-65 percent.

Bloomberg:  What do you make of all the issuance from private credit funds?

DM:  We’ve seen a material pickup in volumes this year compared [with] the past couple of years. We’re seeing new issuers in the BDC space, growth from an asset perspective from the issuers more broadly, and lastly, just very receptive market conditions.

We reopened the market for BDCs six years ago with the first issuance. As the market has grown and investors have learned to appreciate the BDC business model, structure, and credits, the breadth of demand has grown immensely over the last few years. BDC issuance this year is about $13 billion, and the high-water mark was in 2021 when we were just shy of $19 billion of issuance.

Given the run rate through year-to-date 2024, the strong investor reception for BDC credit, and the continued growth in the BDC space, we would expect to see very similar volumes, if not higher, this year compared to 2021.

Bloomberg:  What could go wrong in the high-grade market? 

DM:  We’re enjoying very powerful technicals, with very robust cash balances on the investor side during a period where we’re expecting supply to slow down. We could potentially see a pullback from a risk perspective if there were a pickup in volatility, which could be a result of many different factors that have been out there for the last six months but have yet to have any material impact on risk appetite. That includes the direction of the Fed, geopolitical risk, and even elections.

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