By Matt Tracy
(Reuters) – Some investors are predicting an increase in corporate bond issuance in the New Year, after bond yields slid last week, opening the door for companies to refinance existing debt or issue new debt at lower costs.
Total U.S. investment-grade corporate debt issuance in 2023 is expected to be similar to 2022’s total of roughly $1.23 trillion, according to data from the Securities Industry and Financial Markets Association (SIFMA) trade group, well below 2021 and 2020 totals of $1.47 trillion and $1.85 trillion, respectively.
But investors and other market participants now see issuance picking up next year following expectations of a quicker pace of interest-rate easing after last week’s Federal Reserve meeting. There are $770 billion in investment-grade bonds due in 2024, according to data by Morgan Stanley.
The majority of corporate borrowers have been waiting for the Fed to cut rates before refinancing in the current high-rate environment.
“This should be an extremely welcome environment for corporate issuance,” said Blair Shwedo, head of U.S. sales and trading at U.S. Bank.
Shwedo cited the combination of buying in U.S. Treasuries and a tightening of credit spreads – or the difference in interest rates between Treasuries and corporate bonds of the same maturity – that has resulted in lower borrowing costs for companies.
Continued spread tightening will lead to more high-grade bond supply next year, albeit mainly due to refinancing needs, according to Steven Oh, global head of credit and fixed income at asset manager PineBridge Investments.
High-grade corporate bond yields have fallen 36 basis points since the Fed’s meeting last week, when officials outlined a median forecast of 75 basis points in net rate cuts next year. Yields ended Friday’s session at 5.20%, according to the ICE BofA U.S. Corporate Index.
BofA Global Research analysts said in a Dec. 14 report that the drop in yields had an immediate impact on supply and demand for investment-grade bonds. “First, it weakens the outlook for the market technicals by weighing on yield-sensitive demand while encouraging opportunistic supply,” they wrote.
Markets are now pricing in a less than 70% chance of a Fed rate cut by March, earlier than previous bets and further supporting the case for a pick-up in investment-grade issuance next year.
Even so, some market participants expect 2024’s total IG issuance will align with this year and last, expressing a belief that the market is overestimating the timing and length of rate cuts next year.
“We don’t see a big change in the outlook for forecasted supply for 2024,” said Natalie Trevithick, head of investment-grade credit strategy at asset manager Payden & Rygel. Companies typically only refinance 6%-10% of their total outstanding debt on an annual basis, she added.
Regardless, lower borrowing costs and growing investor appetite for riskier corporate debt have shifted the market dynamic more in favor of borrowers, according to Trevithick.
“The market now feels that we are at the end of the Fed hiking cycle,” she said, “and that has given investors a lot of comfort in terms of wanting to own (corporate bonds).”
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