© Reuters. FILE PHOTO: A view shows a stop sign at a security gate of the US Treasury Department building in Washington, US, January 20, 2023. REUTERS/Kevin LaMarque
Written by Shankar Ramakrishnan, Matt Tracy, and Laura Matthews
NEW YORK (Reuters) – Big U.S. companies have been in a bond issuance frenzy, but that rapid pace of supply may be hard to sustain ahead of expected volatility over an extension of the U.S. debt ceiling and another possible move higher in interest rates.
Investment-grade companies issued $152 billion in May, making it the busiest May since 2020 when the pandemic crisis drove record debt issuance volumes, according to data from Informa Global Markets. Meanwhile, companies classified as unimportant raised $22.1 billion, the busiest May since 2021 when 73 companies raised $49.1 billion.
“I think we saw an acceleration in issuance through May,” said Richard Wolf, head of the US bond syndicate at SG CIB, saying this was a result of the delay in debt issuance.
“So the following months should see a slight decrease in supply,” Wolf added.
This wave of debt issuance comes on the back of strong demand for relatively high-yielding corporate bonds after treasury yields rose in May from levels touched in late April.
New investment-grade bonds in May received orders three to four times the average offering size, according to IGM data.
The junk bond also got decent demand because yields of just under 9% were “really attractive levels historically that we haven’t seen in years outside of the pandemic or energy crisis before that,” said Manuel Hayes, senior portfolio manager at assets in London. Insight Investment Manager.
“It’s an attractive source of income considering the bonds are primarily issued by companies rated in the upper ranges of junk, so they had a lower probability of default,” he added.
change of tide
However, the overabundance of debt gave a broad hint that the world’s largest companies are not optimistic about borrowing terms later in the year.
Funding costs are likely to rise in the near term due to the drain on liquidity — the Treasury Department is expected to issue nearly $1.1 trillion in new Treasuries (Treasuries) over the next seven months, according to JPMorgan (NYSE:) latest estimates, to replenish its coffers.
Spreads on corporate bonds as a premium over treasury bonds or credit spreads that have been stable so far are expected to widen, increasing financing costs for potential borrowers.
“Credit spreads are likely to widen from here given macro concerns about the debt ceiling and resulting large near-term Treasury issuance, Fed tightening to curb inflation, and geopolitical risks,” said Jessica Lehmann, head of investment and emerging markets. HSBC Markets Syndicate.
Fed fund futures traders now see that the Fed is more likely to raise interest rates this month rather than leave them unchanged, as economic data beat expectations and lawmakers seem to have reached an agreement to raise the debt ceiling.
“I can expect liquidity to become an issue even if debt ceiling negotiations find a solution, especially if rating agencies continue to worry about how positions and negotiations will be handled,” said Blair Choedo, head of investment grade trading at US Bank.
“There is a credit sensitivity and a higher bar for issuers of securities that are less knowledgeable and less liquid,” said Gian Daime, director of US IG syndication at TD Securities. He added that this bar “may continue to rise, in case of further market turmoil.”
