The first full week of December is traditionally a busy period for major corporations to finalize their year-end borrowing. This year, however, the issuance of corporate bonds is experiencing a noticeable slowdown. Market experts suggest that this decrease in activity may be attributed to companies tapering off their borrowing efforts for the year as the holiday season approaches.
Investors, on the other hand, may find this slowdown challenging. Despite the decline in issuance, corporate bonds are offering some of the highest yields in years. The bond market has improved significantly following November’s powerful rally, which saw Treasury yields retreat from a 16-year high reached in October. Returns on the benchmark investment-grade Bloomberg U.S. Aggregate index have also turned positive after spending a significant part of the year in the red.
The iShares Core U.S. Aggregate Bond ETF has witnessed a rebound in trading value, recovering from its lowest point since the global financial crisis. These positive developments provide a favorable backdrop for issuers of corporate bonds.
Looking at historical data, the issuance of highly rated corporate bonds in December has varied widely in recent years. However, experts believe that this month’s issuance will fall somewhere between previous figures, indicating a moderate level of borrowing activity.
Despite the slowdown, companies considering bond issuance can expect a warm reception from investors. Funds are available for investment, and clients are eager to capitalize on the attractive yield opportunities in the corporate bond market.
Overall, while the holiday season may be slowing down the issuance of corporate bonds, there is still optimism surrounding the market. Investors remain interested in the asset class given its improved performance and lucrative yield potential.
U.S. Bond Market Rally Highlights Optimism for Rate Cuts
The U.S. bond market, like stocks SPX DJIA, has experienced a recent rally. This surge comes as benchmark borrowing costs have dropped and inflation pressures have eased. Additionally, investors have grown more optimistic about the potential for Federal Reserve rate cuts in 2024.
As an indicator of market tone, the ICE BofA U.S. corporate index began December with a spread of 111 basis points above the risk-free Treasury rate. This is the lowest level observed since February 2022, according to Fed data.
Spreads represent the premium that investors receive on bonds above the Treasury rate, providing compensation for default risks.
Despite the favorable conditions, many companies have refrained from issuing longer-dated bonds. This cautious approach avoids locking in higher borrowing costs for an extended period.
General Motors (GM), for example, paid investors approximately 25 basis points less in spread than initially expected due to strong demand for their bonds. The 5-year tranche was priced at 160 basis points above Treasurys, while the 10-year class was priced at 185 basis points above the risk-free rate, according to Informa Global Markets.
According to Nick Elfner, co-head of research at Breckinridge Capital Advisors, the month of November has seen significant spread compression. In addition, the rally in the benchmark AGG index is notable. Elfner views the current positive market sentiment as a trend that could persist through next week’s Fed officials policy meeting. He believes that investment-grade corporate bonds will remain “well bid” until the end of the year.