The Scoop on 2019's U.S. Corporate Bond Issuance...So Far
For most of 2018 corporate bond issuance was relatively strong, propelled by promising growth prospects and healthy M&A activity despite a rising rate environment and plenty of political turmoil. But the year was capped by a very weak December for issuance. We asked Richard Wolff, Societe Generale Americas’ head of U.S. High Grade Syndicate, to give us his thoughts on the new issue Investment Grade corporate market so far in 2019.
How is 2019 shaping up, coming off a good year but a bad last month?
Investment Grade corporate bond issuance for the first three months of the year is well below what we saw in 2018. Some of the companies that would normally have issued in the early part of the year didn't come to market because the first two weeks of the year experienced a tremendous amount of uncertainty and volatility. Plus, we’ve seen a lot of the large acquisition related corporate issuance completed already. It seems to me that the larger M&A related trades were executed by U.S. corporate treasurers over the past three years, when rates were lower and funding costs were fairly inexpensive. As the year goes on, we may see issuance propelled by smaller bolt-on acquisitions in the billion or two billion size but I would not expect it to be like the large-scale M&A we saw last year.
Also, from a macro perspective, issuance may be dampened so far this year because of the lower economic growth expectations that have emerged recently, crimping the need for institutions to raise new money for expansion or hiring.
Is the slower start to the year surprising given that the Fed recently signaled that low rates are here to stay for a while?
I don’t believe it is surprising. We had predicted roughly a 5% drop in issuance in 2019 relative to 2018. In 2016, when 10-year Treasury rates were at 1.6%, no corporate Treasurer could resist that, it was just a fantastic opportunity for companies to fund. But now, with the markets expecting no rate hikes, and even with 10-year Treasuries moving from where we started the year (2.65% down to 2.40%), yes, it’s attractive, but my personal view is it doesn’t move the needle that significantly in terms of new issuance. Off a 2.65% rate, many Treasurers were issuing 10yr debt close to a 4% coupon, or right around there for investment grade bonds. So currently, with treasury rates adjusting slightly lower because of dovish Fed sentiment, these companies can now issue closer to 3.75-3.875%. It's a benefit but it's not significant enough to cause them to alter or accelerate their current funding plans.
What’s investor appetite been like for corporate bonds in this environment?
In a falling interest rate environment, which is what we are experiencing now, you would usually see credit spreads widen. However, this is not the case in 2019. So far this year, issuance for overall Corporate supply is down ~3.5%, while financial institutions supply is down 17%, and that has exacerbated a spread compression. The current supply/demand dynamic in the market right now, which is skewed way more towards demand than supply, has investors clamoring for blocks of Investment Grade paper, which is pushing spreads tighter across most of the credit curve.
Where are investors finding yield with rates generally moving lower?
There’s a very interesting shape to the curve right now. Six-Month paper is actually offering more yield than the 7-year treasury note. So, we're starting to see investors move out of the very, very low yielding paper, which is currently 2020-2021 paper, and move into either a much shorter (6 months) or longer dated (5yr+) paper. Investors right now are extremely aware of the shape of the Treasury curve and are trying to take advantage of inconsistencies in the market.
Unless otherwise stated, any views or opinions expressed herein are solely those of Richard Wolff and may differ from the views and opinions of others at, or other departments or divisions of, Societe Generale (“SG”) and its affiliates. No part of Richard Wolff’s compensation was, is or will be related, directly or indirectly to the specific views expressed herein. This material is provided for information purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or financial instrument. The information contained herein has been obtained from, and is based upon, sources believed to be reliable, but Societe Generale and its affiliates make no representation as to its accuracy and completeness. The views and opinions contained herein are those of the author of this material as of the date of this material and are subject to change without notice. Neither Richard Wolff nor Societe Generale has any obligation to update, modify or otherwise notify the recipient in the event any information contained herein, including any opinion or view, changes or becomes inaccurate. To the maximum extent possible at law, Societe Generale does not accept any liability whatsoever arising from the use of the material or information contained herein.
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