If you’re looking for evidence that the general tenor (readers will hopefully appreciate the pun) of markets in the new year is perhaps more forgiving than it should be considering the Fed’s avowed intention to raise rates further into restrictive territory and hold them there, you might point to robust corporate issuance.
US high grade sales were a very respectable $154 billion in January, when both new issue concessions and bid-to-covers were indicative of strong demand. “Increased issuer confidence surrounding the reception to supply will only serve to entice further issuance,” BMO’s Daniel Krieter and Daniel Belton remarked.
IG spreads are the tightest since April, and as of Thursday afternoon were some 50bps below the highs seen in early October.
The net share of respondents to BofA’s January credit investor survey who said high-grade spreads were overvalued rose to 69%, a one-year high and up sharply from just 39% in November. Credit investors overwhelmingly cited recession as their biggest concern in 2023.
Given the proximity of the Fed meeting, it was telling that four of Thursday’s five deals either priced through their guidance range or re-launched at tighter levels. Suffice to say sentiment in the primary market is strong, which is nice if you’re an issuer trying to get ahead of higher borrowing costs and a potential earnings recession.
Supply broke a January record in Europe, with nearly €250 billion in bond sales. As one market participant put it, in remarks to Bloomberg, “issuers are becoming more aware that when there’s a window they just need to make sure they get out rather than waiting.” With the ECB still in play, “issuers are thinking it is only going to get more expensive to sell bonds, especially if you issue in the shorter end,” the same person said.
Junk sales in the US were nearly $20 billion last month, the most since January of last year. Onerous market conditions effectively slammed the door shut in 2022.
Of course, junk would be in the firing line if recession fears are realized.
Globally, IG bonds notched one of their best Januarys ever, rallying some 4% on the heels of a very challenging 2022, during which global IG and HY credit returns were negative to the tune of 17% and 13%, respectively.
Flows have been robust this year. EPFR’s data shows IG funds have taken in more than $34 billion so far in 2023.
Although Lipper’s figures showed US IG funds shed $582 million during the latest weekly reporting period, that came on the heels of a combined $12 billion inflow over the prior three weeks.
“Following last year’s $133 billion cumulative outflow from investment grade bond funds, flows this year have totaled $11.2 billion,” BMO’s Krieter and Belton noted, referencing the net inflow over the year’s first four weeks as reported by Lipper.
“While we have opined numerous times in the past that we view flows as following, rather than leading sentiment, the turnaround in this metric is extremely supportive,” they added.
