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Companies rushed to sell $69 billion in high-grade bonds this week, the second-highest weekly amount ever, according to BofA Securities.
Despite this big start to the year, the total amount of high-grade bond issuance could decline.
“I think this is going to be another year where issuance volumes are down,” said Hans Mikkelsen, head of investment grade corporate strategy at BofA Securities. “When you look at the main drivers of volumes, one of the biggest volumes is M&A [merger] activity. The environment this year is not very favorable for new M&A. There’s too much political uncertainty with the U.S. elections. That’s one of the main swing factors for supply.”
The volume this week is second only to the $76.2 billion issued in the week of Sept. 6, just two weeks ahead of the Fed’s September meeting and second rate cut of last year, according to BofA. The biggest deal was $4.5 billion by energy firm, ETP, followed by $3.5 billion from Western Midstream
“The reason is the decline in interest rates. Corporate rates are very close to the lowest we’ve seen in three years,” said Mikkelsen. He said the rate on the ICE/Bank of America investment grade bond index is 2.87%, about the same it was at in early September. That represents the rate on corporate bonds at all investment grade rating levels that have an average 11 years before maturity.”
Mikkelsen expects this year’s total issuance to trail last year’s $1.205 trillion in investment grade debt. There was a record $1.396 trillion in 2017.
“Back in 2017, there was a lot of debt capacity. They levered up so much that 50% of the market is now rated BBB. There is not a lot of additional capacity,” Mikkelsen said. “A lot of large companies are deleveraging.” AT&T and CVS are among them. BBB is a rating that is just above junk, and companies are wary of being downgraded, so many are avoiding further leverage, he said.
Corporate borrowers have been cleaning up their balance sheets, with many reducing leverage and fewer looking to issue stock or dividends, funded by debt. Mikkelsen said most of the deals this week have been relatively small, with a high number of issuers looking to refinance.
For instance, Western Midstream, one of the week’s largest issuers, priced $3.5 billion of senior notes and said it would use the proceeds to pare back debt and use for general capital needs.
Mikkelsen said he expects the rush to refinance to continue, but it may slow down as companies start reporting earnings. Fourth quarter earnings season begins next week, with major banks reporting. Right after those reports, banks may bring their own offerings to market, as they often do following earnings releases.
As corporate issuance flowed this week, Treasury yields rose. Much of the move was related to the retracement of last week’s sharp decline on Mideast jitters.
“It could have contributed to the pressure higher in yields, once Iran passed,” said John Briggs, head of rates at NatWest Markets. “Once the pressure was relieved, we saw a lot of supply come to market and crowd out Treasurys.”
The 10-year yield touched 1.786% last Friday, after reports that the U.S. killed Iran’s top general. This Friday, the yield was at 1.82% after rising as high as 1.9% on Thursday.
