Banks share their latest observations
New reports suggest investors have grabbed hold of bonds at an unprecedented rate, but indications suggest their hunger for this debt has limits.
Across the board, bond prices have dipped by approximately one cent per dollar this month on average, influenced by the hefty $720 billion in fixed-income securities that companies and governments have put up for sale. Observers note that the leveraged loan market is beginning to encounter resistance, with some issuers offering wider spreads than initially proposed to close deals, as outlined in a recent note from Citigroup Inc.’s Michael Anderson.
JPMorgan Chase & Co has issued a cautionary note, suggesting that risk premiums for high-grade US corporate bonds could expand next month, partly due to currently elevated valuations, as the market softens in February, a trend often observed. Data compiled by Bloomberg reveals that investment-grade corporate bond spreads averaged a mere 0.93% on Thursday, marking the tightest level in two years.
Factors that influence the market
Bill Zox, a portfolio manager at Brandywine Global Investment Management, predicts, “At some point, the supply will begin to overwhelm the demand and spreads will widen.” He advised caution in the Bloomberg report, especially for those relying on the new issue market to deploy capital, as it’s becoming increasingly risky.
Demand remains relatively robust at present, according to the report. The average high-grade US corporate bond yield stood at around 5.2% last week, a decline from approximately 6.4% in mid-October. Companies are capitalizing on the lowered borrowing costs, while investors seek to secure higher yields before central banks initiate rate cuts and coupons start to further decline.
When Procter & Gamble Co. recently issued $1.35 billion worth of bonds, the 10-year portion of the deal offered investors only 37 basis points in extra yield over Treasuries, marking the narrowest spread on record for a decade-long maturity.
Speculative-grade firms like Caesars Entertainment Inc. have also taken steps to refinance debt, contributing to the total junk volume for this month surpassing $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.
According to Bank of America Corp’s latest investor survey, many fund managers have started selling bonds and increasing their cash reserves amid concerns that the end-of-year debt rally has peaked.
According to Citigroup’s note, the percentage of the leveraged loan market trading above par has dropped to approximately 53%, down from just over 63% two weeks earlier, as lenders exercise more caution.
Anderson observes, “We are starting to see some push back from lenders,” noting that “some cracks are appearing” amid the ongoing repricing.
Have something to say about this story? Leave a comment below.
