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Companies issued record volumes of US debt this week as they moved to head off possible volatility from closely watched economic data, a Federal Reserve meeting and a fast-approaching presidential election.
Twenty-nine US investment-grade bond deals hit the market on Tuesday alone following the Labor Day holiday, data from LSEG shows — the highest daily number on record.
Another burst of activity on Wednesday took issuance over those two days to just under $73bn, the largest figure in LSEG records going back 20 years. More blue-chip deals followed, taking total borrowing across 60 high-grade issuers to almost $82bn — marking the busiest week since May 2020.
“It’s definitely been much busier than we could have ever imagined,” said Teddy Hodgson, global co-head of fixed income capital markets at Morgan Stanley.
Recent borrowing has spanned various sectors, with a $2.5bn deal from Ford Motor Credit, a flurry of bond sales by banks, a $750,000 deal from Target and a $4bn deal from Uber, which marked its first such transaction as an investment-grade company after being upgraded last month.
Investment-grade borrowers typically rush to tap lenders in early September. But senior debt bankers said the record-breaking issuance this week also reflected a desire to get ahead of any potential volatility sparked by economic data or the US election in early November.
“Issuers [are] pulling forward issuance in an effort to de-risk ahead of potential event risks out there, including upcoming economic data reports, the Fed’s decision on rates, the election and ongoing geopolitical risk while navigating blackout periods,” said Dan Mead, head of Bank of America Securities’ investment-grade syndicate.
Borrowing costs had fallen over the summer, bankers added, making this week a particularly attractive moment to refinance some of the debt set to mature in the next couple of years.
The average yield on an investment-grade bond stood at 4.8 per cent on Thursday, according to Ice BofA data, down from 5.6 per cent in early July. Even after a sharp drop in Treasury yields over that same timeframe, the spread — or premium — paid by borrowers to issue debt over the US Treasury had climbed only marginally.
Bankers also said that a bout of turbulence last month, triggered by a surprisingly weak US payrolls report for July, had reminded companies about the risks of delaying fundraising only to find that conditions moved against them.
“One thing for sure that happened in August was that people started talking about recession again for the first time in a long time,” said Maureen O’Connor, Wells Fargo’s global head of investment-grade syndicate. “The risk of a proper recession is still quite low, but it’s higher than it was at the start of the summer. I think there is a reminder there.”
“[There is] the perfect storm, of sorts, creating this issuance environment,” she added.
For Hodgson, “the volatility at the beginning of August served as a wake-up call to issuers, once again reiterating that in periods of volatility, this market moves a lot faster in a negative direction than in a positive direction”.
Another payrolls report on Friday showed that US employers had added 142,000 jobs in August, up from a downwardly revised 89,000 in July but fewer than economists had expected. On the same day, top Fed officials left the door open to large interest rate cuts if data showed signs of worsening.
Markets were on Friday broadly pricing in bets of at least a quarter-point rate cut when the Fed concludes its next meeting on September 18, which would take borrowing costs down from their current range of 5.25 to 5.5 per cent — a 23-year high.
Still, another closely watched consumer price index reading is due next week, while a number of companies also enter their earnings blackout period in October — further limiting borrowing windows.
Additionally, bankers said that concerns about possible volatility as November’s election draws closer was another factor pushing treasurers to meet funding needs now.
“I do think there’s definitely a component of it which is people saying ‘I’m going to finance in the last four months of the year; why don’t I just go way ahead of the election?’,” said Richard Zogheb, head of global debt capital markets at Citi.
“I think the market largely expects things to be open regardless of the outcome of the election, or regardless of who wins,” said Morgan Stanley’s Hodgson.
But “if we get into another one of these contested elections or protracted legal battles, and a long drawn out process over the last two months of the year and into 2025, you don’t really want to be sitting there with a big funding need and become a forced borrower”.
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