In a notable development for the financial markets, US blue-chip companies have ramped up bond issuance to the highest rate for any July in six years, driven by robust investor demand and a strategic move to secure high yields ahead of anticipated Federal Reserve rate cuts, Bloomberg reports.
According to the latest data, US investment-grade bond issuance soared to nearly $92.2 billion in July, marking the largest monthly volume since the $123 billion recorded in 2017. This impressive figure not only exceeds the top forecast of $85 billion but also reflects a substantial surge in market activity with a week still remaining in the month.
Strong demand drives issuance
Apollo Debt Solutions BDC and Whistler Pipeline LLC are among the companies expected to issue high-grade debt, following recent investor calls.
UnitedHealth Group Inc. and Occidental Petroleum Corp. collectively issued $17 billion on Tuesday, using the funds for refinancing and acquisition financing, respectively.
In the Bloomberg report, Winifred Cisar, global head of strategy at CreditSights Inc., attributes this surge to risk premiums being near their lowest levels in over two years and robust investor demand.
“There’s still strong funding conditions with IG spreads holding near the tight end of the recent range.”
She emphasized the significance of these conditions for banks and financial firms.
“We always say that supply follows demand, and demand has been nothing short of stellar with year-to-date investment-grade net inflows almost to full year 2023 levels.”
Bullish investor metrics
Additional indicators suggest a bullish investor base. The premium companies pay to attract investors, known as new issue concessions, was just 3.5 basis points as of Tuesday, compared to the 2023 average of 8.5 basis points, according to Bloomberg’s Brian Smith. Order books have averaged 3.7 times deal size this year, up from 3.5 times last year.
Typically, debt sales decline during the US summer, but this year has been an exception.
Leveraged loan sales have also set new seasonal records. Investor optimism has been fueled by signs of falling inflation and employment, leading to expectations of multiple Fed rate cuts this year, potentially starting as early as September.
Anticipating market volatility
Companies are issuing more debt this month in a “continued ‘pull forward’ effect,” as described by Cisar, to preempt potential market volatility surrounding the US presidential election in November.
This trend has persisted throughout the year, with US investment-grade companies borrowing $867 billion in the first half of the year, the second-largest amount on record, following 2020’s pandemic-driven borrowing.
Issuance volumes in January and February also set new records this year.
Future outlook: boom not expected to last all year
Despite the current rush, the issuance boom is not expected to last all year.
Dealers forecast between $1.3 trillion and $1.5 trillion in new issuance for the year, with $959 billion already issued as of July 23, indicating a significant slowdown in the coming months.
Collin Martin, fixed-income strategist at Charles Schwab & Co., anticipates a possible slowdown in August. However, he believes companies needing to issue debt will not delay.
“I don’t see anybody holding off issuing if they need to because spreads are so low. So maybe we see kind of a slower end to the summer before it picks up a little bit in the fall.”
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