How anxious are corporate management teams to get out ahead of Donald Trump’s inauguration? Very.
Or at least that’s what the debt markets seem to be saying. For the first time since 2012, banks were pricing corporate bond deals on the first trading day of the year. Nearly a dozen firms sold roughly $20 billion in debt in the US last Tuesday – the most on record. Here’s what that figure looks like in context:
(Chart: FT)
By the end of the week, supply totaled at least $73 billion (which as you can see below, is an outlier to say the least):
(Chart: FT)
But while the headlines focus on supply, BofAML reminds us that it’s really all about demand. “It starts with the demand side of the equation,” Dan Mead, the bank’s head of US investment grade debt syndicate said. “[Investors] came off a very strong performance in 2016 and came into the new year with large cash balances.”
This comes on the heals of the strongest year on record for debt issuance. 2016’s total was ~$3.6 trillion. And while FT notes that higher rates and a relative dearth of mega M&A deals will likely mean we won’t set a new record in 2017, IG issuance likely will hit a new all-time peak at close to $1.4 trillion.
(Charts: Morgan Stanley, Dealogic)
Indeed, as Goldman points out, retail money continued to pour into IG credit in 2016 despite the fact that rising rates reduced the extent to which investors could depend on bonds to provide capital appreciation.
“Fund flows were surprisingly stronger in IG relative to HY in the fourth quarter, even as IG total returns fell by 2.9% amidst the 85bp rates backup while HY gained 1.9%,” the bank wrote, in a note out earlier this week. “In the final quarter of 2016, IG funds managed to attract $6.8 billion, split evenly between mutual funds and ETFs.”
(Chart: Goldman)
The lion’s share off early issuance has of course come from banks who are expected to benefit from a more forgiving regulatory regime under Trump and the prospect that a steeper yield curve will help to boost NIM.
Meanwhile, policy divergence led to a record year for reverse-Yankee deals although, as Goldman goes on to point out, the widening EURUSD cross currency basis (which I’ve discussed at length) at times curtailed supply as jitters about the ongoing USD shortage (exacerbated by the expectation of money market reform) peaked during the summer:
The widening yield gap between the USD and markets has spurred “reverse Yankee” supply last year. Reverse Yankee supply reached a record €94 billion last year, or 2.5x its post-crisis average, as US corporations sought to secure cheaper EUR financing, especially aiding multi-national companies with operations abroad and a natural need for EUR funding. While last year was a record year, in aggregate, for reverse Yankee activity, the monthly pace was choppy, falling significantly during the summer months when the rise in LIBOR increased the cost of FX hedging, or the expense for reverse Yankee issuers to swap EUR back to USD, to onerous levels. The selloff in US Treasury rates in the fourth quarter ushered in a return of reverse Yankee supply, however, as the USD/EUR yield differential widened to its highest level in December in at least 16 years (2.4%), at the same time as hedging costs stabilized (Exhibit 8). We expect reverse Yankee supply will continue to increase, especially as the rising US/EUR yield gap outpaces the more modest increase in hedging costs.
(Chart: Goldman)
So that’s where we stand in investment grade credit as we close out a record week for supply.
Companies are hell-bent on locking in borrowing costs and frontrunning Trump’s presidency and it’s easy to understand why. Although one might view this as a vote of confidence (i.e. corporate management teams expect the reflation trade to continue and thus expect higher yields), it might also be seen as a sign that at least some corporates would rather get deals done today than subject themselves to the vagaries of tomorrow.
Business as usual! No problem can’t be solved with more,more and more again.