The investment-grade bond market is expected to slow down in the second half of the year, following a first half that saw borrowers rush to raise funds before the Federal Reserve's tighter monetary policy narrowed the issuance window.
The first quarter of 2022 was busier than the second, contributing about 63% of the US$735.5bn of deals completed in the first six months of the year, according to IFR data. But the onset of rate hikes and concerns about the US economy's ability to stave off a recession put a damper on dealmaking in the second quarter.
The slow-down is expected to continue for the remainder of the year, especially because the investment-grade market's most prudent issuers have already refinanced in anticipation of rising interest rates.
"Companies are in actually pretty good shape," said Natalie Trevithick, head of investment-grade credit strategy at Payden & Rygel. "They took the opportunity in 2020 and 2021 to pre-fund a lot of maturities. They also extended out the curve by issuing out the curve, when you had low long-term rates and pretty tight spreads."
Indeed, the cost of refinancing is increasing for corporates as rates rise. The average yield for an investment-grade issue was 4.63% on July 4, up 228bp since the start of the year, according to ICE BofA index data.
As costs have increased in the first six months of the year, bankers have been advising their clients to refinance sooner rather than later.
"We have some issuance in the second half of the year that was pulled forward,” said Dan Mead, head of investment-grade syndicate at Bank of America. “The higher all-in financing costs, due to wider credit spreads and higher rates, has made pre-financing trades less attractive [now]."
Forecasts cut
Market participants have started to cut their issuance forecasts for the entire year of 2022.
"As opposed to getting around US$1.4tn on the year, we're more likely to see something closer to US$1.2tn," said Trevithick.
Bank of America's syndicate desk said it expected a deeper fall in investment-grade bond issuance in 2022 than the 12% drop it had initially penciled in for the year.
High-grade dealmakers expect fewer opportunistic offerings in the coming months, and more transactions from frequent borrowers in the financial, utilities and telecom sectors. Companies in those industries will keep returning to the market to fund their business operations or replenish their capital levels regardless of where interest rates lie, they said.
The issuance estimates are not set in stone, however. Merger-related bond issuance could turn into a wildcard and lift high-grade supply expectations for 2022. But based on the visible M&A bond pipeline, this source of event-driven financing looks muted for the rest of the year, said BofA's Mead.
Ultimately, the pace of the bond primary will revolve around the expected trajectory of the Fed's interest rates and Treasury yields. Once rates stabilize, the alluring yields on offer in the investment-grade market are expected to draw out bond buyers.
“Expectations of issuance really depend on when rates begin to plateau and roll over,” said John Gentry, head of the corporate fixed-income group at Federated Hermes