Ever since a thunderous start to September's bond calendar, which saw a record 20 companies issue $26 billion in record cheap investment grade debt in a single day, corporate America has been on a historic bond selling spree to lock in ultra-low rates and refi existing debt (making Wall Street i-bankers quite happy in the process). For the entire week, companies borrowed a total of $75 billion in investment-grade paper, the most for any comparable period since records began in 1972. Since Tuesday, corporations including Coca-Cola, Walt Disney, and Apple sold notes as yields have dropped.
The frenzy isn’t letting up. According to Bloomberg and Bank of America, at least another $50 billion is projected for the rest of the month, with the activity expected to spill over to junk bonds and leveraged loans as well, and not even today's Ford downgrade to junk affecting $84 billion in debt, is expected to put a damper on the party.
The reason for the bond issuance frenzy? Rates have never been lower - according to Bloomberg Barclays index data, the average yield on bonds was 2.77% as of last week, effectively at all time lows, and almost 2% lower compared to late November, when that figure was above 4.3%. For a company selling $1 billion of debt, that amounts to $15.3 million of annual interest savings. Junk-bond yields have dropped too, with notes rated in the BB tier, the uppermost high-yield levels, paying a near record-low 4.07%.
"This is a great time for companies to refinance,” Christian Hoffmann, a portfolio manager at Thornburg Investment Management, told Bloomberg. "Financing costs are near all-time lows, so I would not be surprised to see better high-yield companies coming to market and treating debt capital markets like a cheap buffet."
As we noted last week, borrowers are taking advantage of the recent drop in rates to refinance their outstanding bonds at lower costs. As BofA noted last week, the new issuance "use of proceeds" has shifted from supporting re-leveraging activities to refinancing in the currently low interest rate environment.
Investors who believe this seemingly perpetual credit rally is finally losing steam may be looking to own the highest quality, most liquid bonds as a haven. Lower-coupon, longer-maturity paper is also attractive should rates continue to grind lower
Foreign investors, meanwhile, may be seeking to maximize their yield pickup amid rock bottom rates in Europe and Japan.
Yet even with today's sudden spike in yields, which saw the rate on the 10Y TSY jump to 1.65% from 1.55% earlier, in the process unleashing a historic quant factor liquidation as momentum stocks got crushed and value stocks soared, the bond issuance frenzy continued as sixteen issuers priced $13.7 billion following last week’s historic calendar, as companies across sectors and ratings buckets continue to tap high-grade debt capital markets in droves.
Some more details on this year's frenzied bond issuance, from Bloomberg:
- Nearly 3x as many companies have tapped the market month-to-date vs the same period last year - 67 companies have sold debt vs 24 in 2018
- September supply is 55% ahead of last year’s pace (and that includes Cigna’s $20 billion deal 12 months ago). YTD issuance is now about 3% behind last year’s pace, after lagging by as much as 13% in recent months.
- While some have argued the surge is simply a reversion to the mean following the summer slowdown, August supply was in-line with dealer projections
Finally, some advice from Bloomberg: if you were hoping for a quieter day Tuesday, don’t hold your breath, as it’s shaping up to be another active session, especially as demand simply, contrary to previous years, refuses to go away despite record supply.
In fact, credit spreads have not only held in, but tightened, and strong investor appetite has led to minimal to negative new issue concessions.
Investors who believe this seemingly perpetual credit rally is finally losing steam may be looking to own the highest quality, most liquid bonds as a haven. Lower-coupon, longer-maturity paper is also attractive should rates continue to grind lower. Meanwhile, as BofA speculated last week, foreign investors may be seeking to maximize their yield pickup amid the rock bottom rates in Europe and Japan.