August Corporate Bond Issuance Breaks All Records Thanks To Relentless Demand For Yield

It has been a scorching August for the continental US, with the government's Climate Prediction Center predicting, for the first time on record, that every square inch of all 50 states is forecast to see above-average temperatures for the next three months. The entire forecast map, shown below, awash in the red and orange colors of unusually warm temperatures for a 3-month period is unprecedented, according to Dan Collins, a meteorologist with the prediction center. Typically parts of the map register blue, depicting the likelihood of cooler-than-normal air, or white for equal chances of cool and warm.

However, that is nothing compared to what is taking place in the blistering bond market, where new bond issuance is on pace to blow away all records.

According to Bloomberg calculations, companies raised about $88 billion worldwide in the first week of August, the most for the period in Bloomberg data going back to 1999. The unseasonably brisk pace continued on Monday, with BMW, HSBC Holdings and BNP Paribas selling 2.1 billion pounds ($2.7 billion) of notes, according to data compiled by Bloomberg. The deluge has continued in the US session where just moments ago Berkshire Hathaway announced a $2 billion debt offering in four parts. This was followed by Archer-Daniels-Midland announcing a $1 billion 10Y offering, and many more smaller issues.

The catalysts for this debt issuance surge, much of which will be used to fund future stock buybacks, is familiar: the boom in issuance, including a $19.75 billion Microsoft deal, has been fueled by record-low borrowing costs as well as the traditional fallback, namely central banks Europe and Japan buying assets to stimulate growth. Microsoft held its biggest bond sale on Aug. 2 to help finance the acquisition of LinkedIn Corp.

The Bank of England last week cut interest rates and expanded quantitative easing to help support the U.K. economy following the nation’s June 23 vote to the leave the European Union.

“Issuers have realized they’ve got a slightly longer window than they would normally see,” said Luke Hickmore, senior investment manager at Aberdeen Asset Management Plc in Edinburgh, which oversees 301 billion pounds. “August tends to be a very quiet month.”

Just this morning BMW confirmed it is taking advantage of the latest largesse unveiled by the BOE: the German carmaker sold 600 million pounds of six-year bonds. The notes were priced to yield 0.88 percent annually, according to a person familiar with the matter, who asked not to be identified as they aren’t authorized to discuss the matter publicly. It is not clear if the BOE bought any part of the offering. “In view of the Bank of England’s rate cut and announced QE measures last week, market conditions have improved, so we are taking advantage of that,” Ziye Zhou, a spokesman for the Munich-based automaker, said in a phone interview.

Indicatively, as the FT reports, BMW tapped the sterling market for a £600m 6-year bond, which is set to yield about 0.98 per cent, according to HSBC, one of the banks on the deal. That’s a massive drop from the last time the German carmaker tapped the sterling market for a 6-year bond. In November 2015 it stumped up a yield of 2.42% for a 6-year sterling bond, "underscoring the prolific rally the market has enjoyed this year. The deal has racked up orders of £1.3bn, allowing it to trim the yield by 8bps from initial price guidance." Thank the ECB and the BOE.

As the scramble for yield continues, the average yield on sterling-denominated corporate bonds has fallen to a record-low 2.25 percent, according to Bank of America Merrill Lynch index data. Globally, the average is near the lowest ever at 2.3 percent, the data show.

With no deterrents on the horizon, the pace of US corporate debt sales — which has not been fast enough to quench investor demand — is expected to continue unabated driven by foreign buyers in a world where roughly $13tn of sovereign and corporate debt trades in negative territory. “It is a low return world,” says Ed Campbell, a portfolio manager with asset manager QMA cited by the FT. “You don’t have a lot of asset classes that are attractive and there is a flight to quality where the US is outperforming.”

Meanwhile, the YTD tally is already staggering and on pace to break issuance records: more than $2.3tn of dollar-denominated debt has already been issued by companies and banks since the year began, including three of the ten largest corporate bond sales on record, Dealogic data show.

“You can feel this wall of money coming in,” says Stephen Kotsen, a portfolio manager with Nomura Corporate Research and Asset Management. “We are seeing flows from every region and every type of investor because of the central bank easing. That wall of money has to be put to work.”

Why the scramble? Simple: spreads on corporate paper remain above 2014 lows, which investors say provides more cushion for the trade into US company debt to endure. “What people are looking for is a little bit of yield [and] the chance of capital gains,” says Nick Gartside, JPMorgan Asset Management’s fixed income chief investment officer, pointing to the difference between yields on European and US company bonds. “A yield of 2.83 per cent can fall a lot more than a [yield of] 0.71 per cent.”

As a result of this scramble for debt, the rate locks being put on by asset managers who seek to isolate rate risk, are pushing the yield curve wider, with yield on the 10Y having been pushed higher during the day.

Meanwhile, corporate leverage already at record highs as we showed last week...


.... is back to crisis levels, and when shown as a % of GDP, is now back to levels where it was during the last two financial crisis:

  • 2016: 45%
  • 2007: 45%
  • 2000: 45%

Maybe this time will be different. While we wait for the answer, for those eager to frontrun central banks, here is BofA's list of the top names that it thinks are eligible for the BoE’s bond buying program and highlights where these issuers are also eligible for the ECB’s CSPP.