Trading fever hits the US corporate bond market as loan premiums fall

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Businesses rushed to approach lenders in the $10 trillion U.S. corporate bond market this week, taking advantage of feverish investor demand and low borrowing premiums to boost growth. issue a series of new debts.

High-yield or junk-rated companies have issued more than $14 billion in dollar denominations bonds this week with more than 20 transactions, according to data from LSEG and FT calculations, the highest total since the end of 2021.

Investment-grade borrowers, which typically have much more stable access to capital markets thanks to better credit quality, sold $56.7 billion in new bonds across 45 issuances – the dollar amount The largest weekly dollar raised since late February and the largest transaction in the past two years. five and a half.

Bankers and investors emphasized growing confidence in the market that U.S. interest rates are unlikely to fall sharply this year, prompting companies to meet capital needs now rather than risk spending. Higher borrowing costs while waiting for another opportunity. America November election also threatens to destabilize the market later in the year.

They also point out that prices are becoming more attractive since Federal Reserve Chairman Jay Powell indicated last week that the next interest rate move is could hardly be higher. Recently weaker than expected job market data also helped fuel predictions of a quarter-point or two interest rate cut later this year.

The latest wave of investment-grade and high-yield borrowing comes in the form of credit spreads, or premiums, that corporate borrowers pay to issue debt. US Treasury bonds, reached its lowest level in nearly two decades this week. Price spreads have tightened as large investors rushed into the market to lock in attractive interest rates.

Dan Mead, head of investment grade at BofA Securities, said: “It’s clearly been an exceptionally busy week in the investment grade bond market, especially the first three trading sessions this week ”. “I think what we’ve seen is probably a concession on the part of issuers that interest rates will stay higher for longer and less expectation that we’ll see interest rates fall anytime soon down significantly.”

“Last week we prepared for a pretty decent reception here,” said Laleh Bashirrad, managing director of financial aid at BNP Paribas. “I think investor optimism has shifted to ‘hey, it’s higher and more manageable’ [point of view].”

Some of the high-yield borrowers entering the market this week include health care group Organon, which sold $1 billion worth of bonds to help repay a term loan, while Oil and gas exporter Hilcorp sold bonds worth $500 million, with the proceeds partly intended for financial support. repay the loan. Block, the payments company, issued $2 billion worth of bonds in a scaled-up deal.

A bond from IT business Presidio has increased in size from $500 million to $750 million, after $250 million was transferred from a concurrent loan deal with a final total value of $1.85 billion. The proceeds will be earmarked to fund private equity firm CD&R’s redemption majority stake in Presidio from BC Partners.

In the investment-grade market, which has seen a particularly strong start to the year for borrowing activity, bond deals priced this week include a $5 billion offering from pharmaceutical giant CVS, a $3 billion sale from Coca-Cola and a $2.25 billion bond issue from the Italians. Eni energy company. Cable TV and broadband company Charter Communications sold $3 billion in bonds in part to prepay a term loan and fund potential stock buybacks.

However, market participants say the pace of issuance may start to slow.

“We had record issuance volumes throughout the first quarter and then of course we saw this boom this past week,” said BofA’s Mead. “Our expectation remains that largely due to the extension of issuance, meaning the second half of 2024 will be quieter.”

At a lower level, BNP’s Bashirrad said “issuers are getting smarter” at taking advantage of opportunities. “When that window opens, just tap it.”

Many of the new issues were met with strong demand from investors, narrowing spreads and lowering borrowing costs relative to Treasuries.

The average U.S. high interest rate spread fell to near its lowest level since 2007 on Monday, according to Ice BofA data — hitting 3.03 percentage points, before when expanding as the number of releases increases. The average investment spread tightened to just 0.88 percentage points, its lowest since late 2021 and just inches from its narrowest point since 2005.

Adam Abbas, head of fixed income at Harris Associates, said the narrowing of spreads reflects a combination of “strong technical factors” and “people’s growing belief that The Fed can overcome this – reducing inflation without fundamentally changing the economic picture.”