The new issue market is booming, starting off 2023 with sales of nearly $600 billion, fueled by a worldwide rally that’s seen every type of bond soar 4.1%, reports an article in Bloomberg. With mounting evidence that inflation is easing and hope that central banks will begin to pivot, investors are becoming more eager for debt and turning to fixed-income assets. “The run-up in bond prices has legs in our view,” Omar Slim of PineBridge Investments told Bloomberg.
High demand for offerings and massive inflows into high-grade U.S. credit has brought borrowing this month to record levels, with issuance of both investment- and speculative-grade government and corporate bonds up to $585 billion around the globe, according to Bloomberg data. In addition, U.S. investment-grade credit is at 123 basis points, well below the 200 basis points usually seen during a recession. However, some investors are worried that high bond yields won’t make up for the risks of a slowing global economy, and spreads, which are already at their tightest in nine months, could tighten even more. “If investment grade spreads continue to decline and get back to that 1% area…that would just be too tight given the economic outlook,” said Collin Martin of the Schwab Center for Financial Research. But Bloomberg Intelligence is predicting that U.S. investment-grade bonds will bounce back to 10% in 2023.
Around the world, bond sales have been uneven. In Europe bank sales are over $108 billion in new bonds, the highest on record for a single month, and sterling debt has also had a robust start to 2023. But issuance is slowing in Asia, with China set to take a week off for the Lunar New Year holidays. And one sector still trying to catch up is speculative-grade debt, partly due to junk-rated firms now waiting for interest rates to go back down before diving back in. But movement in high-yield deals in Europe could be a sign that demand may pick up soon. Notes with a 3-year tenor or lower have seen sales jump more than 80% from the same period two years ago, while bonds with maturities of 10 years or more have seen their issuance rate decline. “We are still quite defensively positioned even that we are yet to see the full impact of the rate hikes on the real economy and earnings,” Pauline Chrystal of Kapstream Capital told Bloomberg, though she is now looking to take “a more balanced approach where we are also looking at how to participate in the market rally.”