In an unprecedented surge, the U.S. corporate bond markets are witnessing a remarkable boom as companies have successfully sold a record-breaking $150 billion worth of debt since the beginning of this month, marking the most active start to the year in over 30 years.

Data from the London Stock Exchange Group reveals that investment-grade groups alone have issued an astounding $153 billion in bonds in January, establishing a new record for year-to-date figures for dollar-denominated debt. This milestone represents the highest issuance since 1990.

Companies are racing to capitalize on lower interest costs, spurred by a rapid decline in borrowing costs and a desire among investors to acquire new bonds before anticipated U.S. interest rate cuts later this year.

Corporate borrowing costs have experienced a significant drop since the strong market rally late last year, triggered by signals from the U.S. Federal Reserve that it had concluded its series of interest rate hikes. Investment-grade yields currently stand at 5.34%, slightly higher than year-end levels but substantially lower than mid-November levels of over 6%.

The spread, or premium, paid by borrowers to issue bonds over the cost of U.S. Treasury yields has narrowed to just 1.01 percentage points, marking the lowest level in two years, according to Ice BofA index data.

While the first month of the year typically witnesses heightened new issuance activity, industry experts believe this month’s extraordinary surge is driven by companies rushing to leverage the fall in yields.

More than two-thirds of this month’s borrowing activity has been initiated by banks and other financial entities, with concerns about potential increases in banks’ regulatory capital requirements driving some of the demand. However, Zogheb emphasized that the primary factor propelling issuance is a “pent-up need to issue paper,” as many companies delayed debt-raising plans last year following the Silicon Valley Bank collapse.

Major banks including JPMorgan, Wells Fargo, and Morgan Stanley have joined the borrowing spree, collectively raising substantial amounts. Notable non-financial companies participating include Energy Transfer, EQT, T-Mobile, and Canada’s Liberty Utilities.

Some market participants suggest that borrowers may be seeking to get ahead of any economic data that could threaten the positive market sentiment. “Everybody’s bought into the ‘soft landing’ narrative at this point,” remarked Maureen O’Connor, Global Head of Wells Fargo’s High-Grade Debt Syndicate.

Finance directors are opting to issue debt now, unwilling to risk waiting for further market fluctuations. As one senior banker noted, “No treasurer is going to get fired because he left 10 or 15 basis points on the table. Some treasurer is going to get fired for not financing and then seeing the market shut down for a couple of months.”

By: Delino Gayweh
Serrari Financial Analyst
January 22, 2023