After two days of record sales in the US blue-chip corporate debt market, another 11 companies are looking to sell bonds on Thursday, and demand for the securities is holding strong by key measures.
Nearly 50 companies, including Uber Technologies Inc., already sold a combined $71.9 billion worth of new bonds earlier in the week, representing the highest two-day new issuance volume on record, according to data compiled by Bloomberg. The 11 additional companies pitching debt sales on Thursday would push the weekly volume even higher.
Companies are rushing to take advantage of the open window for issuance at a time when borrowing costs are lower and investor appetite is still hearty. That dynamic could soon change as the Federal Reserve is expected to cut interest rates this month and investors work through the slew of recent issuance, all of which could limit demand.
For now, though, companies are seizing the opportunity.
“Treasury yields have declined as much as 150 basis points depending on the tenor, while corporate credit spreads have been relatively resilient; thus, the overall cost of borrowing has declined significantly,” said Scott Kimball, chief investment officer at Loop Capital Asset Management. “As long as this dynamic remains in force, it’s safe to expect a lot of primary issuance.”
Average high-grade bond yields have fallen to the lowest in over two years, reaching 4.81% on Wednesday. The holiday-shortened week is unlikely to top a record of $117 billion in April 2020, but could bubble above a comparable week that included Labor Day in September 2021, Bloomberg’s Brian Smith wrote in a note.
Companies have been pulling forward issuance they had planned for later in the year to avoid expected volatility.
In addition to regular economic data reports that can send the market into a tizzy, the Fed meets in two weeks to make a decision about its rate target. Although Fed Chair Jerome Powell has strongly suggested a rate cut is coming, investors don’t know how big it will be and the central bank has not matched Wall Street expectations during this cycle.
The US elections in November are even more of a wild card in terms of who will be in the White House and which political party will lead Congress.
“Given the US elections, the FOMC meetings and the fact that many companies are in third-quarter earnings reporting season black-outs for most of October — and that seasonally December sees low volumes — it’s almost like either you issue now or wait until next year,” said Hans Mikkelsen, managing director of credit strategy at TD Securities.
Strong Demand
Demand for corporate bonds has held strong, even as investors grapple with the sheer amount.
Borrowers paid about three basis points, or 0.03%, in new-issue concessions on deals that were more than four times oversubscribed, Bloomberg’s Smith wrote. Deals issued on Tuesday have already traded tighter, signaling strong demand.
Investors were well prepared for this week’s rush of new deals, Bank of America Corp. analysts led by Yuri Seliger wrote in a note on Wednesday. The Tuesday after Labor Day is typically one of the busiest days of the year in the investment-grade primary market.
“It was not a big surprise to IG investors, who came into the month prepared with enough cash to absorb most of it,” the analysts wrote. “IG spreads were mostly unchanged [Wednesday] despite continued heavy supply. That suggests IG market technicals remain unusually strong despite the drop in yields.”
New issuance volumes are expected to taper off a bit next week after heavy post-holiday action, Kimball said. Monthly issuance is already over half way to dealer estimates of $125 billion.
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