A large influx of issuance in US corporate bond markets

Oct 12, 2023

Andrzej Skiba discusses why we have recently experienced a heavy dose of new bond issuance.

US corporate bond markets sprung to life in September as investment grade companies looked to rush to capitalise on investor interest for debt ahead of possible interest rate rises. Although corporate debt issuance did slow down through the later part of the month as yields continued to rise with inflationary concerns. Potential issuers are becoming increasingly judicious, monitoring how yields and spread volatility perform against a backdrop of relative uncertainty as we move into October.

Despite the slowdown at the end of the month September was still a big month, but lower than street expectations; issuance in September of 2023 was higher than that of the same period in 2022.

Over the course of the month of September total Investment grade and high yield issuance for was ~$156bn (September 2023: $133bn IG / $23bn HY) an uplift of $66 billion from the year before (September 2022: at ~$90bn ($83bn IG / $7bn HY).

Spread premiums are evaporating

Coming out of the typically slow summer season, markets are digesting this large influx of new issuance quite well. Usually, investors could expect some level of spread premium in purchasing bonds in the new issue market. Interestingly, these spread premiums have evaporated against this deluge of supply in September, with primary bonds coming at levels on top of those outstanding in the secondary market.

To us, this indicates a credit market that is highly expectant of a soft landing into the later stages of this cycle and that market participants feel credit fundamentals remain strong. It also suggests that although spreads are relatively snug, investors feel that all-in-yields still show value toward a compelling carry trade.

Fundamentally speaking, year-to-date upgrades in the investment grade credit market have outpaced downgrades from 102 to 84. Although downgrades outpace upgrades in the high yield bond market, interest coverage ratios and companies’ profitability remain high relative to historical averages in this space – this further suggests credit strength.

Looking ahead

With corporate bonds offering the highest all-in-yields for over a decade, debt investors are keen to lock in the historically high yields on offer from corporate issuers. At the same time, the spate of robust data has eased concerns about a hard economic landing. And despite the uncertainty with regards to growth, inflation and policy, there are attractive yields and carry to compensate for many dangers ahead and, investors will increasingly focus on monetary policy moving towards accommodation.

We remain judicious in seeking relative value and fundamental strength in the deals we participate in both the new issue market and in secondary trading. Dynamism in an active approach will be critically important in the months ahead as dispersion in the views of both federal reserve officials and market participants remain elevated and potential investment outcomes highly varied.

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