US investors look to revival in investment grade corporate bonds
US capital market investors are hoping that an expected $100bn bond issue this month will end the longest drought in the country’s investment grade paper market in 20 years.
“You could get a surge of [investment grade bond] issuance in the first six or seven trading days,” said George Bory, head of credit strategy at Wells Fargo, although he adds that what happens after that will depend on the actions of the Federal Reserve.
On top of the traditional summer lull, both investment grade corporate bond issuance and flotations have been hit by the uncertainty about China and a possible rate hike by the Federal Reserve.
The last US-listed initial public offering was on August 14 when Gore Holdings floated on the Nasdaq while the last US investment grade bonds, excluding financial institutions, came with Hershey’s $600m issue on August 18 — making the barren spell in bonds the longest since 1995 and the dearth of new floats the worst since 2013.
While sentiment around IPOs is subdued, healthcare companies are expected to take the lead.
JD Moriarty, head of Americas equity capital markets at Bank of America Merrill Lynch, said: “In healthcare you may see some issuers move forward and you could see those as soon as [this week].”
“What you will see now is people being hesitant to be the first one. The recent volatility has caused many issuers to focus on the upcoming Fed meeting as a reason to wait,” added Mr Moriarty.
Would-be IPO companies also will need to revisit discussions on valuations since shares of their comparable companies, which weigh in how these deals are priced, have likely fallen in recent weeks.
US corporate bond spreads — the premium investors charge for holding company debt instead of Treasury bonds — have widened significantly this year amid the latest market turmoil. Aggregate credit spreads are up 32 per cent to 1.56 per cent since their February low, although they have tightened slightly since peaking at 1.6 per cent in August.
That widening spread has left Scott Service, a global fixed income portfolio manager at Loomis, Sayles & Company, feeling bullish about markets reopening.
He said he had been buying longer-dated bonds and was sanguine about the prospect of new supply pushing spreads wider.
“Early in the year I don’t think you were getting paid for the risk in the marketplace, but now I think that value proposition is better,” he said.
“Even if you get a small widening given new issue concession we still think it’s pretty attractive,” he added.
Elsewhere, rather than the new bond issues being welcomed, the prospect of large level of issuance is being greeted sceptically by investors weary after a year of record supply.
The vagaries of the calendar will probably make things worse, said Jacob Habibi, senior analyst at Invesco.
“We’ve actually only got 16 days, because I don’t expect there to be new deals coming on the day of the FOMC meeting,” said Mr Habibi, which could mean “a lot of heavy days” for the market.
Not everyone is as bullish about bond supply. Hans Mikkelsen, credit strategist at Bank of America Merrill Lynch, has forecast “unusually low supply volumes” of just $60bn of investment grade corporate bonds this month.
He said a lot of issuance was front-loaded to the first half of the year. “I think naturally that means we won’t get a lot of supply in September because some of these needs have been met earlier in the year,” he added.