Blue-chip companies take advantage of low interest rates for record bond issuance

The demand for high-grade corporate bonds is increasing at a rapid pace. Numerous companies are taking advantage of the currently favorable interest rates to raise capital before the upcoming presidential election in November. As of today, the annual volume is expected to surpass the one trillion dollar mark – just eight months into the year. Weak economic data from the past week triggered market fears that the Federal Reserve might have waited too long to cut interest rates. This led to a market downturn on Monday, causing at least ten issuers to refrain from issuing new debt. However, on Tuesday, with somewhat calmer market conditions, seven companies decided to issue new bonds. The issuance activity is driven by two main factors: first, there is the significant demand from yield-hungry investors who are increasingly investing in this asset class. Second, financial executives are keen to raise cash ahead of potential market volatility due to the presidential election. Yields on high-grade bonds have dropped to 4.99% in recent days, the lowest level since February 2023. This presents an attractive opportunity for issuers to raise capital on favorable terms. Additionally, the yield on the 10-year U.S. Treasury bond fell below 4% for the first time since February, marking a psychological threshold for many issuers, as explained by Barclays strategists Bradley Rogoff and Dominique Toublan in a report on Friday. Blair Shwedo, head of bond trading at U.S. Bank, said in an interview, "If Treasury yields remain low, we will likely see increased issuance activity even in a volatile market, as financing costs are as attractive as they have been since early 2022. If you can lock in costs now, it is the best time in over two years." Risk premiums – the extra return investors demand to compensate for the higher risk compared to U.S. Treasury bonds – have risen by 18 basis points over the past three trading days, reaching the highest level since November. Richard Cheng, portfolio manager at Nuveen Asset Management, sees room for further widening of spreads: "We entered July assuming that spreads were slightly overvalued as a higher likelihood of a soft landing was priced in." Overall, June was the busiest month of the year so far, fitting into an otherwise active year. Companies raised $867 billion in the first half of the year, the second-highest volume according to Bloomberg data, only surpassed by 2020. July was one of the busiest months of the past seven years with a volume of $118.9 billion. The credit markets typically experience a slowdown in debt issuance during the U.S. summer, but this slowdown has not yet materialized. Sales of U.S. private debt and asset-backed securities also reached new seasonal records over the summer. It is expected that companies will slow down bond issuance, but likely not until after the presidential election in November. Traders anticipate about $95 billion in new bond issuances in August, which would be the highest value for this month since 2022. September is historically one of the busiest months for the high-grade primary market.