US corporate bond market heads for early close

Bankers and borrowers in the US corporate debt market may close early for the holidays due to low volume of new speculative-grade debt deals as investment-grade firms reckon this week is their last realistic chance to sell bonds.

Next week will bring new inflation data and the Federal Reserve rate decision, and Wall Street prefers to avoid surprises. Some syndicated debt desks are already terminating 2022 operations with just a couple more deals.

High-yield debt sales projections for the month consider a volume of around US$20,000 million and that this week up to 75% of the agreements will be carried out. That would make this month the slowest December in three years.

“This is effectively the last full week for this year’s investment grade bond sales as the Fed will likely scale back next week”JPMorgan Chase & Co. strategists led by Eric Beinstein wrote in a note Monday.

Some opportunistic borrowers may bring deals next week, especially if data shows inflation cooling from the highest level in decades and the Fed confirms speculation it is slowing the pace of interest rate hikes. Market rates indicate that the central bank will announce a half point increase in interest rates on overnight loans at its meeting on December 13-14, less than the 75 basis point increases it has made in its last four meetings.

Money in hand

Many companies have already taken advantage of years of low interest rates to shore up their balance sheets and delay debt maturities, reducing the urgency to borrow. Quarterly cash balances for S&P 500 nonfinancial companies stood at $1.9 billion in the third quarter, about the same as the prior quarter, according to a Bloomberg analysis.

December’s investment-grade debt offering has been lower than November’s in every year on record except 2008, and this year will be no exception, JPMorgan strategists said in a separate note published Nov. 30. .

And while 72% of the time credit spreads have tightened in December by an average of 8 basis points (usually an incentive to borrow), the trend has weakened over the past five years, excluding the pandemic year. December 2020. From a spread perspective, December now ranks as the fifth best month of the year to borrow, with spreads narrowing by 4 basis points on average.

JPMorgan strategists expect spreads on investment grade debt to remain within a relatively tight range until inflation data and the Fed’s decision are released next week.

Peter Tchir, head of macroeconomic strategy at Academy Securities, anticipates spreads will tighten as issuance slows before they widen early next year. Any price support for the supply-ask ratio would provide much-needed relief to an asset class that has delivered the worst annual returns on record.

“I would relax at the end of the year and early next year, as I think the wave of bad economic news continues and that will put pressure on credit spreads”Tchir said in an emailed response to questions asked Monday.

If the bad news continues, spreads could widen sooner, he added. It recommends that investors buy debt from new issues, especially from infrequent issuers. He likes bonds that mature in two to seven years for the full return they’re getting.