After debt sale deluge, early signs of a hangover
Investors have snatched up record amounts of bonds in January, but they’re showing signs that their appetite for the debt isn’t endless.
Prices for bonds have broadly fallen by about a penny on the dollar this month on average, hurt by the more than $720 billion of fixed-income securities that companies and governments have sold. The leveraged loan market is already seeing signs of pushback, with some issuers offering wider spreads than originally discussed to get deals done, Citigroup Inc.’s Michael Anderson wrote in a note in the latest week.
JPMorgan Chase & Co. meanwhile cautioned that risk premiums for high-grade US corporate bonds may widen next month, in part because valuations are so high now, and the market often weakens in February. Investment-grade corporate bond spreads averaged just 0.93 percentage point on Thursday, the tightest in two years, according to data compiled by Bloomberg.
“At some point, the supply will begin to overwhelm the demand and spreads will widen,” said Bill Zox, a portfolio manager at Brandywine Global Investment Management. “There are select opportunities but you have to be careful. If you are reliant upon the new issue market to put capital to work, that is getting more dangerous by the day.”
For now, demand is still relatively strong. The average high-grade US corporate bond yield was about 5.2% on Thursday, down from about 6.4% in mid-October. Companies are looking to borrow now that the cost of doing so has fallen, while investors are hoping to lock in higher yields before central banks start cutting rates and coupons start falling further.
When consumer goods behemoth Procter & Gamble Co. sold $1.35 billion of bonds earlier this week, the 10-year portion of the transaction offered investors just 37 basis points in extra yield over Treasuries. That’s the narrowest spread on record for debt maturing in a decade.
Speculative-grade firms like Caesars Entertainment Inc. have also moved to refinance debt, helping drive the total junk volume for this month to more than $22 billion.
“From a purely credit fundamental perspective, companies trying to do balance sheet management and push off their maturities is a really positive thing,” said Bob Kricheff, portfolio manager at Shenkman Capital Management.
Many fund managers have already started selling bonds and boosting their cash holdings amid concerns that the end-of-year debt rally has run its course, according to Bank of America Corp.’s most recent investor survey.
As lenders become more circumspect, the percentage of the leveraged loan market trading above par is now about 53% compared with just over 63% two weeks earlier, according to the Citi note.
“We are starting to see some push back from lenders,” Anderson wrote, adding later that amid all the repricing, “some cracks are appearing.”
