US corporates binge on debt before likely liquidity drain

Big US companies have been on a bond issuance binge but this rapid pace in supply may be hard to sustain ahead of expected volatility related to extending the US debt ceiling and another possible hike in interest rates.

Investment-grade rated firms issued $152bn in May, making it the busiest May since 2020 when the pandemic crisis prompted record debt issuance volumes, according to data from Informa Global Markets. Junkrated companies meanwhile raised $22.1bn, for the busiest May since 2021 when 73 raised $49.1bn.

“I believe we have seen an acceleration of issuance into May,” said Richard Wolff, head of US bond syndicate at SG Corporate & Investment Banking, saying this was a result of debt issuance being pulled forward.

“So the ensuing months should see a slight moderation of supply,” Wolff said. This debt issuance spree is on the back of strong demand for what were relatively higher yielding corporate bonds after Treasury yields rose in May from levels touched in late April. New investmentgrade bonds in May received orders that were three to four times the offering size on average, according to IGM data.

Junk bonds got decent demand as yields at just under 9% were “historically really attractive levels we haven’t seen for years outside the pandemic or the energy crisis before that”, said Manuel Hayes, senior portfolio manager at London-based asset manager Insight Investment. “It’s an attractive income source considering bonds are being issued primarily by companies rated in the upper bands of junk so had a lower probability of default,” he said.

The debt binge gave a broad hint that the largest companies in the world are not optimistic on borrowing conditions later in 2023. Near-term funding costs are likely to spike due to a drain on liquidity — the Treasury is expected to issue nearly $1.1-trillion in new Treasury bills (Tbills) over the next seven months, according to recent JPMorgan estimates, to replenish its coffers. Spreads charged on corporate bonds as a premium over Treasuries or credit spreads which have been stable so far are expected to widen, adding to funding costs prospective borrowers.

“It’s more likely credit spreads widen from here given the macro concerns of the debt ceiling and resultant near-term large T-bill issuance, Fed tightening to dampen inflation, and geopolitical risks,” said Jessica Lehmann, head of investmentgrade and emerging markets syndicate at HSBC.

Fed funds futures traders see the Fed as more likely to hike interest rates in June as economic data beats expectations and legislators appear to have reached a deal to raise the debt ceiling. I could foresee liquidity becoming an issue even if the debt ceiling negotiations come to a resolution, particularly if ratings agencies continue to sour on how the situations and negotiations were handled,” said Blair Shwedo, head of investmentgrade trading at US Bank.

Despite what looks like a strong new issue backdrop, “there is credit sensitivity and a higher bar for less familiar, less liquid issuers”, said Jiyann Daemi, director, US IG syndicate at TD Securities. He said that this bar “might continue to move higher, should there be further market dislocation”. for