By Davide Barbuscia
NEW YORK (Reuters) – U.S. bond sales by investment-grade issuers will likely decline by around 10% this year as borrowers contend with higher rates and market volatility, a BofA executive said on Tuesday.
Corporate bonds have had a rough start to the year amid investor concerns over the impact of tighter monetary policies on corporate profits and borrowing costs, as well as the possibility of a sharp economic slowdown as the Federal Reserve tries to bring down unrelenting inflation.
Credit spreads – the interest rate premium investors demand to hold corporate debt over safer U.S. Treasury bonds – have widened, though not dramatically.
The ICE BofA U.S. corporate index, which tracks dollar investment-grade corporate debt, stood at 149 basis points on Monday, about 50 points wider year-to-date and three basis points shy of the nearly two-year high it hit in March.
In the first few months of this year, U.S. investment-grade corporate bond issues totaled around $470 billion, in line with levels seen in the same period a year earlier, as borrowers concerned about higher rates sought to lock in still-favorable financing terms, said Dan Mead, head of investment grade syndicate at BofA.
But that pace has slowed recently as markets became increasingly volatile on the back of monetary policy and economic growth concerns.
“We’re still sticking with our expectations on overall supply of down roughly 10% to 12% this year compared to last year, as we do anticipate the second half of this year to be quieter, certainly quieter than the second half of the year that we saw in 2020 and 2021,” Mead said.
U.S. investment-grade bond issuance last year amounted to roughly $1.5 trillion, according to Refinitiv data.
As global central banks rapidly withdraw stimulus measures, liquidity in financial markets has deteriorated this year, with traders having to navigate wild intra-day swings and shrinking deal sizes.
“The big theme in our marketplace, like other asset classes, has been volatility, in both the rates market and volatility in the credit spread market,” said Mead, adding that contributed to greater caution from investors.
“They’re still very engaged in participating, but maybe on a smaller scale with respect to size in deals, and certainly showing a greater deal of price discipline, needing to see larger concessions to participate in new issues,” he added.
U.S. credit markets rallied after the Federal Reserve started hiking rates in March, but that was short-lived and lower-rated corporate bonds have hit new lows since.
The Fed is expected to hike interest rates by 50 basis points in both June and July, and plans to start reducing its balance sheet in June at a higher pace than it did in its previous “quantitative tightening” exercise.
“Those factors – the rate hikes, the QT – are going to start to affect the real economy,” said Mark Howard, a managing director at BNP Paribas in New York.
“What’s notable about what we’ve seen in markets over the last week or so, is moving away from a fear of higher rates to more of a fear of growth deceleration,” he said, “and that contributes to some of the anxiety in the short term in credit. … Growth concerns are hurting spreads now.”
(Reporting by Davide Barbuscia; Editing by Leslie Adler)
