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BLUE-CHIP companies sold bonds this month at the fastest rate for any July in six years, harnessing strong demand from investors looking to lock in high yields before the Federal Reserve starts cutting rates.
US investment-grade bond issuance has reached almost US$92.2 billion this month, the biggest July volume since US$123 billion was issued in 2017. That’s well over the top end of US$85 billion dealers expected to be sold, with about a week left to go.
Issuers are taking advantage of risk premiums holding near the lowest levels in over two years, according to Winifred Cisar, global head of strategy at CreditSights. Companies are also acting on powerful demand, she said.
“There’s still strong funding conditions with IG spreads holding near the tight end of the recent range,” Cisar said in a message, adding that it’s especially important for banks and financial firms. “We always say that supply follows demand and demand has been nothing short of stellar with year-to-date investment-grade net inflows almost to the full year 2023 levels,” Cisar said.
Other demand metrics are pointing to a bullish investor base. New issue concessions, the premium that companies pay to entice investors to buy their debt, stood at just 3.5 basis points as at Monday (Jul 22) compared to the 2023 average of 8.5 basis points, Bloomberg’s Brian Smith wrote in a note. Order books this year have run up 3.7 times deal size, compared to 3.5 times on average for the whole of last year.
Credit markets usually see a decrease in debt sales during the US summer, but the slowdown has been less pronounced this year. That’s not just true for investment-grade bonds – for leveraged loans, sales have reached new seasonal records.
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Signs that inflation and employment are falling have in the last three months made investors more hopeful that the Fed will cut rates multiple times this year, potentially as soon as September, which helps boost demand.
Companies are also borrowing more than expected this month in a “continued ‘pull forward’ effect”, Cisar said, getting ahead of any volatility around the US presidential election in November.
That’s been a trend all year, as investment-grade US companies borrowed US$867 billion in the first half of the year, the second largest haul, according to data compiled by Bloomberg, behind only 2020 when the pandemic set in. Issuance volumes in both January and February also set new records this year.
The issuance rush is not expected to last all year. There’s likely to be a downshift as many dealers are forecasting between US$1.3 trillion to US$1.5 trillion of new issuance this year. There’s already been US$959 billion of new bonds issued as at Jul 23, suggesting a pronounced slowing in the coming months of 2024.
But, that likely will not happen until the latter half of the year. There could be a slowdown in August, according to Collin Martin, fixed-income strategist at Charles Schwab & Co, but companies that need to sell debt soon likely won’t hold off, he said.
“I don’t see anybody holding off issuing if they need to because spreads are so low,” Martin said. “So maybe we see kind of a slower end to the summer before it picks up a little bit in the fall.” BLOOMBERG
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