The six biggest Wall Street banks are expected to slash their corporate bond issuance in 2023 for a second year in a row, offering a bright spot for investors nursing record losses from the debt last year.
The biggest US banks could sell a total of $20 billion to $25 billion across currencies this month after they post earnings, according to Bloomberg Intelligence’s Arnold Kakuda and Nicholas Beckwith. That would be about a 15% drop from last year, he wrote. And their full year sales may fall 33% to $132 billion, the strategists wrote.
Banks front-loaded their funding last year before borrowing costs skyrocketed and they have smaller refinancing needs coming up and lower share buybacks, contributing to the slowdown in issuance, according to Barclays Plc. The banks are also largely done funding the massive growth of assets they experienced at the height of the pandemic.
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. post results on Friday, freeing them up to offer new bonds. Goldman Sachs Group Inc. and Morgan Stanley are expected to post results on Jan. 17.
Investors will be less interested in seeing how robust profits were in the final three months of last year and more focused on signs the nation’s biggest banks are girding for a major downturn as rate increases crimp economic activity, equity analysts said.
The top banks will probably be active in the new issue market to partly offset upcoming maturities, but the pace “should ebb from last year’s gusher,” according to Baylor Lancaster-Samuel, vice president of fixed income at Amerant Investments Inc. Almost half of the $56 billion of bonds maturing this year from the six big banks comes due in the first quarter of 2023, with the remaining $29 billion evenly spread across second quarter to fourth quarter, according to Barclays.
“Along with the typical new issue concessions, all-in yields should entice investors to support the big banks, even if their fundamental credit strength shows signs of softness,” Lancaster-Samuel said in an emailed response to questions.
JPMorgan analysts also expect 2023 sales to be lower compared with last year and said they are overweight senior US bank bonds as valuations look attractive. Spreads should benefit from the crimped supply and stable fundamentals, analysts Kabir Caprihan and Nikita Dyatlov wrote in their 2023 Outlook report. They are neutral on subordinated bank debt as valuations are rich but moderate supply should prevent underperformance.
The average spread on a financial institution bond ended Tuesday at 141 basis points, about 13 basis points wider than the broader high-grade index, according to Bloomberg index data.
“Although the deteriorating economic outlook for 2023 will act as a headwind, the sector maintains significant levels of reserves, capital and liquidity,” wrote the JPMorgan analysts.
US high-grade corporate bonds were broadly clobbered last year, losing 15.8% on a total return basis, in their worst annual performance in records dating back to the 1970s, according to Bloomberg index data.
Big banks are usually active in the primary market in January after reporting fourth quarter earnings, but they remained active in February and March last year as rates volatility increased, Barclays analysts led by Peter Troisi wrote in a note last week. Troisi expects more normal issuance patterns this year and is calling for about $25 billion in new supply in January.
“We expect the cadence of supply in 2023 to be close to the historical average after being front-loaded last year,” wrote the analysts.
Issuance from regional banks could surge by about 25% year-over-year to $45 billion as deposit pressure intensifies, according to Barclays. The Federal Reserve and the Federal Deposit Insurance Corp. are worried that regional lenders are increasingly becoming too big to fail and they are proposing that the lenders be required to maintain a bigger cushion of loss-absorbing capacity in times of crisis.
Elsewhere in credit markets:
Americas
Three borrowers are looking to sell fresh debt in the US high-grade primary market on Wednesday, ahead of the consumer price index data on Thursday that could introduce a measure of volatility to broader financial markets.
- FTX Group advisers have found more than $5 billion in cash or crypto assets that it may be able to sell to help repay creditors, a lawyer for the company told the judge overseeing the biggest crypto bankruptcy
- American Virtual Cloud Technologies Inc., a publicly traded information technology company, filed for bankruptcy in Delaware on Wednesday.
- Investments in U.S.-listed fixed income exchange-traded funds doubled the past week for the 15th straight week of inflows. Corporate bond ETFs led the inflows. Government bond ETFs had the second biggest change from the previous week
- The US junk bond market snapped its six-day rally with a modest loss on Tuesday after Federal Reserve officials warned that the benchmark interest rate may remain above 5% for some time. Yields were resilient at 8.32%, near a four-month low
- For deal updates, click here for the New Issue Monitor
- For more, click here for the Credit Daybook Americas
EMEA
The deluge of primary market issuance continued on Wednesday, with tire maker Pirelli & C. SpA, Commerzbank AG and the World Bank among 24 borrowers raising nearly €23 billion of debt.
- The deals lift weekly issuance from the region beyond €90 billion, the highest in a year and already the second-busiest week on record, data compiled by Bloomberg show
- Demand has piled up for the new bonds of UK utilities Thames Water and National Grid, showing just how hot the bond market is at the moment even for names that made the wrong kind of headlines in 2022
- Despite the deal rush, non-financial borrowers remain largely absent, with just a handful of deals pricing so far this month. Issuance of non-financial debt in euros and sterling “may not increase much in 2023” after a 34% plunge last year, given limited refinancing requirements, according to Bloomberg Intelligence’s Aidan Cheslin
Asia
Asia Pacific borrowers are taking advantage of a drop in borrowing costs to sell more than $35 billion worth of bonds so far this year, a record for the period, according to data compiled by Bloomberg.
- The Philippine government had one of its biggest dollar bond deals ever at the start of this year with a $3 billion offering, but for corporate borrowers in Southeast Asia, local-currency debt is still the way to go. Even as borrowers across Asia Pacific raised more than $25 billion from the dollar bond primary market in the first week of 2023, Southeast Asian companies are staying on the sidelines for now
- Indian billionaire Kumar Mangalam Birla’s flagship metals company is returning to the bond market after a decade-long hiatus, looking to raise funds to meet regulatory requirements
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