![Analysis-US credit issuance breaking records as healthy economy emboldens investors](https://i-invdn-com.investing.com/trkd-images/LYNXMPEK140NK_L.jpg)
© Reuters. FILE PHOTO: An eagle tops the U.S. Federal Reserve constructing’s facade in Washington, July 31, 2013. REUTERS/Jonathan Ernst/File Photo
By Shankar Ramakrishnan and Davide Barbuscia
NEW YORK (Reuters) – The U.S. company bond market is about to interrupt new issuance data as debtors benefit from decrease financing prices than final 12 months and buyers, emboldened by the prospect of an financial “soft landing,” pile into the asset class.
The Federal Reserve just lately poured chilly water on market expectations of imminent rate of interest cuts, although its policymakers have projected that charges will fall this 12 months as inflation continues to gradual regardless of ongoing financial energy.
For buyers, this represents a possibility to load up on company bonds that pay excessive yields however have a comparatively low default danger within the absence of a recession.
“It’s a great time to be in fixed income,” stated Lindsay (NYSE:) Rosner, head of multi-sector fastened revenue investing at Goldman Sachs Asset Management.
“Great starting place in terms of all-in yields; a great place to be in terms of the forward path of monetary policy, which is cutting, rather than hiking; and there is a more benign outcome as the recession probability has greatly decreased,” she stated.
Issuance of bonds by firms rated investment-grade surged above $196 billion final month, making it the busiest January on report. This report issuance could also be repeated this month, with BofA Global estimating practically $160 billion to $170 billion in simply investment-grade rated bond provide, which might make it the busiest February ever.
Such back-to-back report months firstly of the 12 months are uncommon even for the prolific funding grade market, which is anticipated to see practically $1.3 trillion of bond issuance this 12 months.
“We have a record issuance month because investors are rushing to lock in debt that had very low default potential and could generate 5%-6% in returns this year if you get in now before yields start falling,” stated Edward Marrinan, a credit score strategist at SMBC Nikko Securities.
STRONG DATA
The prospect of falling rates of interest and a “soft landing” for the economic system – a situation by which inflation cools and not using a painful recession and sharp rise in unemployment – can also be fuelling a seek for yields and boosting demand for the junk-rated bond market. Junk bond issuance volumes touched greater than $31 billion in January, the best degree since November 2021.
For the week ended Jan. 31, inflows into funds and exchange-traded funds (ETFs) investing in investment-grade bonds flipped to an outflow of $1.702 billion from an influx of $3.298 billion within the prior week. Those investing in junk bonds noticed inflows soar to $2.373 billion from $411 million the prior week, TD Securities stated in a report, citing EPFR Global information.
That is partly as a result of investment-grade firms have been issuing bonds at credit score spreads which have little to no premium over the underlying Treasury benchmark and their current paper.
Last month, for example, Procter & Gamble (NYSE:) priced $1.35 billion five-year and 10-year bonds at a ramification over U.S. Treasuries that was one of many tightest ranges on report, in keeping with Informa. The common new problem premium on investment-grade bonds for the month was little to nothing, in comparison with 3 to 4 foundation factors in earlier months.
Brandon Swensen, a senior portfolio supervisor on the BlueBay Fixed Income staff at RBC Global Asset Management, stated he was bullish on each investment-grade and high-yield credit score as a result of robust demand and good fundamentals. But, he stated, valuations are “a bit full”.
Credit spreads have widened in current days however stay largely under ranges seen over the previous two years.
“We’re not pushing all in and saying it’s a huge buying opportunity, but … not that much needs to go right to see some low double-digit-type returns this year,” Swensen stated.
The U.S. Labor Department reported on Friday that U.S. job progress accelerated in January and wages elevated by probably the most in practically two years.
While the info strengthened market expectations {that a} recession this 12 months is unlikely, it additionally dashed hopes that the Fed would lower charges quickly, resulting in a extra selective strategy in riskier elements of the bond market.
“Adding a lot of market risk right now does not feel like the prudent thing to do. We feel like we’re about mid-cycle in the economy … But there’s a lot to be done underneath,” Goldman’s Rosner stated.