The U.S. corporate bond market is experiencing the largest “dismissal” in 30 years. This year, bond issuance has already exceeded $150 billion.
Citing data from the London Stock Exchange Group, major foreign media outlets reported on Monday (local time) that U.S. investment-grade companies have issued 153 billion dollars worth of bonds this month. The figure is the highest since 1990 based on the same period.
Companies are rushing to issue bonds to lower interest costs, and investors are trying to buy bonds before the U.S. begins to cut interest rates later this year. The demand on both sides is right. “The market is burning,” said Richard Joguev, head of Citi Group’s global debt capital market. “Investors want to secure long-term returns (in the run-up to interest rate cuts).” “There are concerns that banks’ regulatory capital requirements could increase,” Joguev said, “The biggest reason is that after Silicon Valley Bank went bankrupt last year, many financial institutions delayed their plans to issue bonds, and demand was suppressed.”
Corporate borrowing costs, which soared after the U.S. Federal Reserve signaled late last year that it had completed a rate hike, have recently fallen again. The U.S. investment-grade corporate bond yield is 5.34 percent per annum. It is higher than the end of last year, but lower than mid-November, when it was around 6 percent per annum.
The spread (gap) between corporate bond yields versus the cost of U.S. Treasury yields decreased to 1.01 percentage points, according to the ICE Bank of America index. That’s the lowest level in two years.
Although the Fed is expected to cut interest rates, some analysts say that companies are preemptively raising funds rather than waiting for further declines. Maureen O’Connor, head of the Wells Fargo Global High-Level Bond Syndicate, said, “Everyone agrees with the possibility of a soft landing, but it is also a factor that is worrisome that there is a catalyst that can cause volatility in the short term.” A senior bank executive said, “A financial officer is not fired for raising funds at a high interest rate of 10-15 basis points (1bp=0.01 percentage point), but if the market slows down without raising funds in time, he can be fired.”