Blue-chip U.S. companies are pulling back from borrowing just when investors most want to lend.
Investment-grade corporate bond sales were below $100 billion in February, the worst February since 2014 and 14% below the monthly average for issuance for the last three years, according to data compiled by Bloomberg. Companies likely moved at least a portion of their debt sales up to January to get ahead of interest-rate hikes and the uncertainties of a Donald Trump presidency, Bank of America strategists led by Hans Mikkelsen wrote in a note dated Feb. 24.
Fund managers poured record amounts of money into the bonds at the start of the year, but even so issuance could remain muted for much of the rest of 2017, the strategists said. January had record sales of $185.5 billion of debt, data compiled by Bloomberg show.
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"March is often the busiest month in the quarter," said Peter Aherne, head of North American capital markets, syndicate, and new products at Citigroup in New York. "I don't think that will be the case this year given how active January was." He forecasts about $100 billion of issuance in March, down from last year's $136.4 billion.
Active Trading
With less new debt to buy, investors purchased more notes in the secondary market, leading to some of the most-active trading weeks for the securities on record, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. More than $100 billion of the bonds traded hands in the first two weeks of the month, which Wells Fargo & Co. strategists called "a new high-water mark for the asset class."
Risk premiums on the bonds narrowed only slightly over the last month, a sign that even if a record $38.5 billion of new money streamed into corporate bond funds, here are also large numbers of investors willing to sell, said the Wells Fargo strategists led by George Bory in a note dated Friday. The extra yield investors demand to hold blue-chip debt over Treasuries dropped to 1.16 percentage point from 1.21 percentage point in February, Bloomberg Barclays index data show.
"You've had all the Trump enthusiasm. Now it's the Trump wait-and-see-what actually happens," said Joe Mayo, head of credit research at Conning, a global insurance investment manager. "We go a basis point wider, then a basis point tighter. There's really not much direction overall."
Slow Month
New bond sales in February fell short of the same month last year, when investment-grade companies sold $108.5 billion of debt, and the second month of 2015, when issuers sold $122.5 billion. The decline came even with a surge of volume toward the end of the month. Blue-chip names including Johnson & Johnson and American Express sold more than $17 billion of bonds on Tuesday, and companies sold more than $11 billion on Monday.
March issuance is usually strong as companies exit blackouts tied to their earnings, but this year investors should prepare to be disappointed by supply, Bank of America strategists wrote. A key factor in determining remaining sales for the year may be whether interest expenses remain deductible for companies under Donald Trump's tax reform plan, and if not when the change goes into effect, they said. If companies' interest costs are not tax-deductible, they will likely borrow less.
Michael Cuggino, president and CEO of Pacific Heights Asset Management, said he's been finding more opportunities in the secondary market, particularly in bonds tied to energy and financial companies, as he waits for more clarity on Trump administration policies that may affect the asset class.
"We've been adding selectively," Cuggino said. "We want to maintain flexibility. You don't have people making huge bets. Most of us are hoping for some specifics."
Bloomberg News
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