The US Corporate Bond Market Just Keeps Smashing Records

Firms are set to make June one of the busiest months ever for junk bond issuance, Bloomberg’s Gowri Gurumurthy writes Friday, noting that high yield supply is set to top $45 billion by the end of this week.

The latest flows data from Lipper shows both high yield and investment grade funds are still riding the Fed wave.

Flows were more subdued in the week to June 17, but nevertheless, IG funds took in more than $4 billion, marking the 10th consecutive weekly inflow.

Since the tide turned for IG flows during the second week of April, high grade funds have taken in nearly $60 billion on Lipper’s data, reversing around 55% of the bloodletting during the panic.

For high yield funds, last week marked a dozen weekly inflows in a row.

Junk funds took in $1.24 billion in the week ended Wednesday, down markedly from the previous week, but inflows nevertheless.

As Bloomberg’s Gurumurthy goes on to note, “the new issue market is still cranking out deals, with seven priced Thursday for $3.9 billion”. Those deals included Abercrombie & Fitch and PIK notes from Century Aluminum.

As of Wednesday, this year’s IG supply topped $1.13 trillion, which means 2020 has already eclipsed 2019 for blue chip US debt issuance.

Needless to say, new details around the Fed’s intentions when it comes to buying individual corporate bonds (see linked post below) further emboldened the market. Through Thursday, issuance for this week was $55.5 billion, blowing past the expected $35-40 billion range.

In a remarkable stat, fixed-income ETFs have enjoyed nearly $80 billion in inflows this year, with more than half going to corporate bond vehicles. By contrast, equity ETFs have taken in just $53 billion, despite total assets that are triple that of the fixed income fund universe.

Panning out a bit further, BofA notes that although cash has been the “unambiguous flow winner of 2020”, the past three months “have seen the largest inflow to IG and HY credit funds ever,” at a combined $174 billion.

(BofA)

Given the backdrop, both in terms of how forgiving the market is, and considering rampant uncertainty around the virus and the US political landscape, it’s at least possible that the expected abatement of issuance will instead morph into a second wave (pardon the COVID pun).

“The expectation is that a summer slowdown, an election and a general feeling that enough is enough will cause the sales spree to taper off, capping 2020 at about $1.5 trillion, but there’s no reason why it can’t hit $2 trillion if companies opt to pre-fund further into next year and beyond, since there’s no end in sight to global economic disruption caused by the virus”, Bloomberg’s James Crombie wrote Thursday, adding that when you consider “all-in rates have never been lower and investors and rating agencies are giving borrowers a free pass on leverage — the time to borrow is now”.

Indeed it is.

The worry, of course, is that all of this debt won’t be serviceable in the event the economy doesn’t recover as rapidly as optimists hope, thereby serving as a longer-term drag on revenues and cash flows.

But there’s always the Fed. “Although the recent leg of the rally has rekindled some concerns about ‘too far, too quickly’, we expect returns to remain robust across [US] investment grade and leveraged credit”, Morgan Stanley said this week, in their second half outlook.

The bank added the following color which speaks for itself:

We do not expect the Fed’s corporate bond purchase programs to run at full capacity for these returns to materialize, but we do expect them to act as a safety net. Our working assumption is that the primary market facility will see minimal take-up but the utilization rate of the secondary facility is likely to be in the 25-50% range. It is not current market conditions but retaining credibility with future crisis interventions that necessitates a follow-through from the Fed. We would also not rule out potential changes in the program if needed to improve the secondary purchase volumes.

Read more: The Fed Will Be Building A Corporate Bond Portfolio. Or Didn’t You Believe Them?