The record corporate borrowing boom fueled by the Federal Reserve’s pandemic response may be coming to an end. Wall Street bankers and investors are preparing for a sharp drop in corporate bond sales next year.
Companies with investment-grade credit ratings will likely issue $1.1 trillion of new bonds in 2021, a 32% reduction from this year, according to research by
PLC. Many are flush with cash after borrowing to bolster their balance sheets through the pandemic’s economic shutdowns.
The anticipated decline becomes even sharper after accounting for expected debt repayments, which offset new bond sales. Analysts at
Bank of America Corp.
forecast that net new corporate bond issuance will be $63 billion next year. That would be the lowest total since the bank began tracking it in 2002.
The Fed has eased borrowing conditions throughout the pandemic by dropping interest rates near zero, saying it expects to keep them there for years, and by implementing other measures, such as buying corporate bonds for the first time. The efforts have helped keep the yield on the benchmark 10-year Treasury note below 1% for months. It settled Wednesday at 0.939%, according to Tradeweb.
A steep decline in bond borrowing would be a sign that corporate chieftains feel less need to buffer balance sheets and that they will be spending some of the $2.1 trillion amassed earlier this year. For portfolio managers, it would be a mixed blessing: A declining supply of new bonds would drive up prices of those investors already own, but make it tougher to find new securities to buy with the cash that continues to pour into bond funds.
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The yield on average U.S. investment-grade corporate bonds recently dropped below a measure of investors’ inflation expectations for the first time, highlighting how demand for fixed-income assets is eroding their potential returns.
“We’ve been discussing this over the past three to four weeks,” said Nuveen LLC Chief Investment Officer
One solution is to focus on large new bond offerings by companies Nuveen sees value in and to “take larger bets with those issuers,” he said. The firm in October purchased big chunks of an $8.5 billion deal Bank of America issued and $7.25 billion of bonds from
Gilead Sciences Inc.
New borrowing has already started to slow, amounting to $65 billion in November compared with $79 billion during the same month last year and $113 billion in September, according to data from Dealogic.
Still, new debt sales could ramp up again—or decline less than expected—if optimism about vaccine distribution boosts activity in the mergers and acquisitions market, said
head of global debt capital markets at
& Co. “There are signs that we’re seeing the light at the end of the tunnels and the confidence to now go out and do M&A.”
The pipeline of announced mergers and acquisitions that could be funded with new bonds has risen to $220 billion from $194 billion at the end of November and $173 billion in October, according to research from Bank of America.
Corporate treasurers may also resume borrowing in bulk next year if interest rates remain at current lows, said
head of U.S. fixed income at BMO Global Asset Management.
“If you continue to show the C-suite of corporate America these types of financing rates, they can’t help themselves but continue to increase their use of debt regardless of what their refinancing needs are,” he said.
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