Great Corporate Bond Rush of 2017 Persists as Fed Mulls HikeBy
Investment-grade issues above $360 billion so far in quarter
Bond sales are 14 percent ahead of last year’s record pace
Companies are issuing bonds in the U.S. at the fastest pace ever. And investors say the Federal Reserve’s next rate hike may do little to change that.
Investment-grade firms are on track to complete the busiest first quarter for debt sales since at least 1999. Firms from Apple Inc. to Morgan Stanley have pushed new issues to more than $360 billion so far in 2017, closing in on the previous record of $381 billion from 2009, according to data compiled by Bloomberg. That puts bond sales 14 percent ahead of last year’s record pace.
Low borrowing costs, rising stock prices, positive economic data and strong quarterly earnings results have all helped fuel the boom, said Dominic Pappalardo, a money manager at McDonnell Investment Management in Oakbrook Terrace, Illinois, which manages $11.5 billion. The extra yield over Treasuries investors demand to purchase the bonds has reached multi-year lows in recent weeks, even as companies such as Delta Air Lines Inc. to Walt Disney Co. have sold more than $78 billion of bonds to investors in so far March.
“Until you see anything change from the economics standpoint or the fundamentals standpoint, I expect corporations to continue to issue for as long as they can at these tight spreads,” Pappalardo said. “They probably should lock it in while they can.”
High-yield bond offerings have also roared back after a plunge in commodity prices muted new issues last year. Junk-rated firms have sold more than $72 billion in 2017 through Monday, compared with $41.7 billion in the first quarter of 2016.
Companies seeking to get ahead of Wednesday’s near-certain rate hike from the Federal Reserve and an expected blizzard in the Northeast on Tuesday sold more than $18 billion of bonds on Monday, led by an $11 billion offering from Verizon Communications Inc.
Despite the onslaught of supply, investors are asking for just 1.16 percentage points more than government debt to hold investment-grade bonds, according to Bloomberg Barclays index data. That’s down from 1.22 percentage points at the beginning of the year. High-yield bond spreads have declined to 3.81 percentage points above Treasuries, compared with as much as 3.95 percentage points in January.
Although the Fed is poised to raise interest rates 0.25 percentage point at the conclusion of its March 14 to March 15 meeting, a hike of that magnitude is unlikely to deter corporate borrowers, Pappalardo said. Borrowing costs are still low, with the average blue-chip company bond yielding 3.5 percent on Monday, Bloomberg Barclays Index data show. That compares with the 30-year average of 5.97 percent.
Still, the Fed’s path to raising interest rates is beginning to stoke concerns among some traders. About 40 percent of investors surveyed by Bank of America Merrill strategists in March now expect that the hiking cycle may send spreads wider, up from 23 percent in January. And half of the investors called investment-grade spreads overvalued in March, compared with 14 percent in January. Eighty-five percent of junk bond investors said spreads look overvalued.
"We’re at this inflection point where spreads probably will not grind too much tighter," said Dan Heckman, a Kansas City-based fixed-income strategist at U.S. Bank Wealth Management, which oversees $139 billion. "We’ve been on this incredible run. I’m not sure we’re at a point where the market is compensating investors for all the risk."