London January 19 2023: The best start to a year for bond returns is helping fuel an unprecedented debt-sale bonanza by governments and companies around the world of more than half a trillion dollars.
From European banks to Asian corporates and developing-nation sovereigns, virtually every corner of the new issue market is booming, thanks in part to a rally that’s seen global bonds of all stripes surge 4.1% to start the year, the best performance in data stretching back to 1999.
Borrowers looking to raise fresh financing after getting turned away for much of 2022 are suddenly encountering investors with a seemingly endless appetite for debt amid signs inflation is cooling and central banks will call a halt to the harshest monetary tightening in a generation. For many, fixed-income assets are looking increasingly attractive after last year’s historic rout drove yields to the highest since 2008, especially as the prospect of a slowing global economy offers the potential for further gains.
“The run-up in bond prices has legs in our view, particularly when it comes to the investment-grade markets,” said Omar Slim, co-head of Asia ex-Japan fixed income at PineBridge Investments. “Corporate fundamentals continue to be broadly solid,” he said, adding that “the sharp U-turn we’re seeing in Chinese policies will provide a much-needed boost to global growth, mitigating some of the tail risks for emerging markets and providing further support.”
Excess demand for offerings, falling new issue concessions and the largest inflows into high-grade US credit in more than 17 months has helped make this year’s January borrowing so far the busiest ever. Global issuance of investment- and speculative-grade government and corporate bonds across currencies reached $586 billion through Jan. 18, the biggest tally on record for the period, according to data compiled by Bloomberg. More issuers were pricing deals on Thursday.
“This is a very good window,” said Giulio Baratta, BNP Paribas SA’s head of investment-grade finance debt capital markets EMEA. “Investors are anticipating that inflation is calming down and seeing this as a good entry point into the market, certainly in the investment grade space and we are seeing it in the orders and how deals are tightening.”
Bloomberg Intelligence forecasts US investment-grade bonds will return 10% this year after their worst performance in half a century in 2022. That’s more than double their forecast for US junk debt, as higher-quality notes often benefit more than junk when economies slow. Emerging-market and investment-grade euro-denominated credit should advance 8% and 4.5% respectively, according to the analysts.
Here are some other notable themes seen so far in 2023.
Euro Binge
The surge in global bond sales to start the year has been uneven. Debt issuance in euros is smashing records, climbing about 39% compared to a year earlier, according to data compiled by Bloomberg. Dollar bond sales are running roughly in line with last year’s robust pace, the data show.
Sterling debt has also seen a bumper start to the year as euro-to-sterling hedging costs are at their lowest since March, meaning it currently costs less for a European issuer to sell sterling debt and swap it back into euros than to issue euro debt outright, data compiled by Bloomberg show.
However, there are also already signs that issuance is set to slow in some regions. Chinese onshore issuers are set to be off for a full week beginning Jan. 23 for Lunar New Year holidays, likely reducing supply in Asia to a crawl, market observers say.
Bank Buffers
Financial firms have led the charge in global issuance this year as a sector, with year-to-date sales topping $250 billion.
In Europe, sales from banks are already at the highest on record for any single month with over €100 billion ($108 billion) of new bonds, according to data compiled by Bloomberg. Financial institutions are seizing on the improved risk appetite and falling credit costs to kick-start their yearly borrowing plans as well as looking to repay cheap pandemic-era European Central Bank loans.
Junk’s Slow Start
One of the few markets struggling to find its footing in terms of issuance is that for speculative-grade debt. Offerings from high-yield corporate and government issuers are running at the slowest pace since 2019, with about $24 billion priced through Jan. 18. That’s likely in part because junk-rated firms that had extended maturities in years past are waiting for interest rates to decline further before taking the plunge. Investor cautiousness about how those borrowers may weather a global recession is also a likely factor.
Still, there are signs that demand may soon pick up.
High-yield deals are starting to emerge in Europe, with Tereos SCA pricing a deal this week and Telecom Italia SpA also mandating for a deal on Thursday. Orthopedic-device maker Limacorporate SpA is marketing a €295 million bond said to yield in the low 10% area, while its private equity owners EQT are throwing in an equity contribution of €48.1 million to further sweeten its appeal.
Front-End Favored
Sales of notes with a three-year tenor or less have climbed more than 80% to $138.5 billion from the same period just two years ago, after yields surged in 2022. By contrast, issuance of bonds with maturities of 10 years or more has slipped.
“We are still quite defensively positioned given that we are yet to see the full impact of the rate hikes on the real economy and earnings,” said Pauline Chrystal, a portfolio manager at Kapstream Capital in Sydney. “However, the discussion for us has shifted from protecting the portfolio last year to a more balanced approach where we are also looking at how to participate in the market rally.”
Elsewhere in credit markets:
EMEA
The record start to issuance this year is keeping pace in Europe as six borrowers look to raise at least €4 billion on Thursday, with French energy giant Electricite de France SA seeking euro and sterling debt.
Telecom Italia is holding an investor call on Thursday for a new euro offering
London’s most expensive homes are managing to defy a slowdown in Britain’s housing market, with new sales instructions for homes priced at £5 million ($6.2 million) or more were 74% higher in the final quarter of 2022 compared with the pre-Covid average, according to data compiled by researcher LonRes
More “defensive names” in the European real estate sector may look to tap the primary market for new senior unsecured bonds, “possibly sooner rather than later,” according to a CreditSights note
Asia
The cost to insure Asia ex-Japan’s investment-grade dollar bonds against default is headed for the first increase in more than a week, after renewed concerns about global economic growth emerged.
China’s $740 billion offshore bond market awaits a fresh test of how creditors are protected by an ambiguous form of payment support, so-called keepwell deeds, as a key court decision looms for one of the country’s biggest defaulters
South Korea’s credit market is recovering from a crisis at two speeds, with investors lapping up the debt of top-tier companies while some other firms are finding it challenging to raise funds
Investors in India are turning away from short-term debt funds as the recent interest-rate hikes impinge on returns, and are piling into equities
There weren’t any significant deals in the Asia Pacific primary dollar bond market Thursday
US Treasuries rallied anew to send the yield on 10-year notes down 4 basis points to 3.33%. The rate has dropped 55 basis points so far this month, heading for the largest decline since 2011
Americas
Jefferies Financial Group Inc. has sounded out investors on a potential secured bond deal for Savers LLC that would help fund a dividend payment to its owner, according to people with knowledge of the matter.
Struggling data-center firm Cyxtera Technologies Inc. is working with Guggenheim Partners to help it address upcoming debt maturities, according to people with knowledge of the situation who asked not to be identified because they aren’t authorized to speak about it
Private-credit investor Blue Owl Inc. has partnered with fintech companies iCapital and Allfunds to further expand its direct-lending offering to individual investors
Moody’s Investors Service expects speculative-grade corporate defaults to jump this year as economic growth slows and tougher financing conditions hurt firms’ cash flow
Brazil’s economic team plans to win back its investment-grade rating by the end of 2026 through a combination of fiscal and tax reforms that would allow for more social spending and debt stabilization, according to Treasury Secretary Rogerio Ceron
