High-grade market records 'massive undershoot' in September
The vicious return of volatility in September as global central banks show no signs of halting their interest rate hikes has led to a disappointing haul of supply for what is typically the investment-grade bond market's busiest month.
The sector booked US$80.55bn of issuance in September, according to IFR data, falling short of syndicate bankers' estimates for around US$140bn–$150bn. That tally makes it the second slowest month so far this year. “It’s a massive undershoot,” said a syndicate banker.
Market participants say September has often been the busiest month because the quiet summer period gives an opportunity for investors to accumulate cash, creating pent-up demand for the supply rush. Issuance in September 2021, for example, came to US$164bn.
But, since the first hectic week after the Labor Day holiday, the new issue market has lost steam. In the last week of September, four borrowers printed US$2.5bn of supply with smaller-sized deals.
The seismic moves in interest rates during recent weeks, sparked by global central banks' efforts to bring down inflation, have stymied issuers' borrowing plans.
The higher-than-expected US consumer prices print in August dealt a blow to hopes that the Federal Reserve would pull the reins on its tightening measures. Now, expectations embedded in money markets suggest the US central bank will go for its fourth consecutive 75bp rate hike in November. Since the end of August, the 10-year US Treasury yield has risen from around 3.13% to 3.76%, latterly flirting with the 4% mark.
"Frankly, the term opportunistic issuance isn't being thrown around anymore," said a DCM banker.
With market participants uncertain when central banks will hit their respective terminal rates, issuance for the rest of the year could be limited, leaving more regular borrowers such as banks and utilities to dominate the supply slate.
Many high-grade corporate borrowers are already well funded, having done plenty of pre-funding when interest rates were much lower earlier in the year and in 2021. Underwriters say some companies that were previously aiming to raise cash in the remainder of 2022 are now willing to wait until next year.
"The backlog of corporate borrowers is the lightest it's ever been," said the banker. "People have been so progressive with their funding patterns, they can now take a pause."
Nonetheless, bankers and investors are optimistic that the high-grade bond market will have plenty of life once rates volatility settles down.
But the reopening could bring its own set of problems. The recent scarcity of supply has helped contain corporate bond spreads, said analysts, with the average investment-grade spread at 168bp, according to ICE BofA index data. An influx of issuance could end up revealing a more expensive cost of capital for borrowers.
“The new issue calendar is the mechanism to re-establish the new spread level," said John Sheehan, a portfolio manager at Osterweis Capital Management. "Since we haven’t seen any new issuance, secondary volumes have been pretty light. When the market reopens, spreads could widen out significantly.”