US debt markets roar in January
The pace of deals in the US corporate and securitised bond markets in January has been relentless even by the standards of previous years.
US high-grade bond issuance this month is at US$174.7bn as of Thursday, on pace to surpass the previous busiest January when supply hit US$176.4bn in 2017, according to IFR data. For asset-backed securitisations, issuance topped US$33bn as of Thursday, blowing past the prior peak of US$21bn set in 2018.
Investors and bankers say the crush of January supply has been driven by expectations for the US Federal Reserve to pivot and ease monetary policy, even if many remain sceptical the US central bank will deliver the number of interest rate cuts that are priced into markets. The 10-year Treasury note yield was at 4.14% on Thursday, down significantly from its October high of around 5%.
“Capital access is expected to be good this year. With the market pricing in possibly four to six Fed cuts this year, the more accommodative policy will be conducive for issuance,” said Raj Kapadia, international head of capital markets at MUFG.
A large chunk of investment-grade supply this month has come from the biggest US banks, which need to refinance 2024 maturities or shore up regulatory capital. In one noteworthy session on January 16, Morgan Stanley, JP Morgan and Wells Fargo took out US$23.25bn of supply between them at minimal new issue concessions.
Money managers have shown appetite for corporate and securitised credit amid a growing consensus that the US economy will achieve a soft landing, avoiding a recession that would push spreads sharply wider.
A recent survey of 300 investors in the US insurance industry – a major buyer of bonds – from asset manager Conning reported that 80% of participants are optimistic about the investment climate for 2024, and 63% plan to increase their allocation to public investment-grade bonds this year.
The focus on the all-in yield offered by corporate credit, as opposed to credit spread, has kept investor demand running high for new issues. The average US investment-grade bond was trading at 99bp over Treasuries on Wednesday, the tightest level since January 2022. But the average yield was at 5.33%, a level rarely touched in the decade before the pandemic, according to ICE BofA index data.
“There’s been tremendous demand given the overwhelming amount of supply we’re seeing,” said Tony Trzcinka, portfolio manager at Impax Asset Management. “It seems to be yield-driven, not spread-driven.”
Hunt for yield
This search for yield has also led investors to wade through the pile of ABS paper, enabling many transactions to price significantly tighter than guidance. Issuers have also expanded a number of asset-backed deals to accommodate robust demand.
And investors have plenty of cash to put to work, with some pointing to the cash hoard parked in money-market funds as a source of future inflows.
“There are signs that there is plenty of cash around and [it is] being allocated to securitised products in 2024,” said Brian Wiele, Barclays' global head of securitised products syndicate.
With ample cash chasing supply, favourable funding conditions are likely to persist. Investment-grade funds, some of which hold structured products, have recorded a brisk US$4.56bn of inflows since the year kicked off, which was a touch higher than the US$4.48bn in 2023, Lipper data show.
But some remain uneasy around valuations, with dealmakers unwilling to discount the potential for disruptions such as overseas military conflicts, banking system hiccups or even another global health crisis.
"Liquidity has not been an issue in the past year," Kapadia said. "But we are not yet out of the woods."
