New York: The market for US investment grade debt is charging into the New Year after a sluggish end to 2016, but the trend could prove to be short-lived.
Issuance of US investment-grade corporate debt reached nearly $60 billion last week alone, rebounding from a lacklustre fourth quarter where just $116 billion was sold in November and December combined. Still, despite the impressive start to the year, sales are expected to fall short of the levels reached in 2016 and 2015.
“It’s possible that the year’s issuance may be front-loaded, with January and February really, really strong,” said Tim Doubek, a money manager at Columbia Threadneedle, which has about $26 billion in investment-grade company debt under management. “People know that the market can go from hot to cold very quickly, so given the uncertainty with the transition in administration and foreign policy, people may be thinking, ‘If risk is rallying, issue as quickly as possible.” ‘
Recap of the first week of investment grade corporate bond sales in the US
Analysts are expecting as much as $110 billion in high-grade corporate bond sales in January. The market already absorbed more than half of that over four days last week. Banks led the New Year surge with more than $35 billion in sales. Yankee issuers, which are foreign finance firms with operations in the US, accounted for a large portion of the financial deals.
Funding Uncertainty
Volume could continue to remain strong through the first quarter because of pent-up demand, issuers looking to front-run rising interest rates and the uncertainty of a new administration. The funding landscape has changed, with Treasury yields climbing in the last quarter of 2016 and projected to continue rising this year. Higher rates diminish the appeal for opportunistic issuers that have become accustomed to raising cash cheaply.
Now, three more hikes are planned for 2017, likely accelerating plans for issuers that want to tap the market before financing costs rise. The market is pricing in a 48 per cent chance of a rate increase by May and a 73 per cent chance of one by June.
A projected decrease in funding for mergers and acquisitions could further crimp issuance totals. M&A has been the main driver of record breaking investment-grade bond sales over the past two years, so a slowdown in activity would throw a wrench in that.
Moreover, if President-elect Trump slashes the tax rate to repatriate corporations’ overseas cash, certain companies, especially from the tech sector, may slow down their debt issuance or decide not to issue at all. However, it’s unclear if tax reform under the new administration will include definitely include this lower tax rate, analysts say.
“As an issuer, you don’t necessarily know what shocks you’re going to encounter,” said Zachary Chavis, a portfolio manager at Sage Advisory Services Ltd., which has $12 billion of assets under management. “You have to trade politics as much as fundamentals. There’s a lot of uncertainty these days. The new administration may send out a tweet that can hurt equities. So you want to get in as soon as possible. If you’re an issuer and you know you have funding, why wait?”
