Views expressed are those of the authors and are subject to change. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional or institutional investors only.
The threat to global economic activity from COVID-19 has lent further support to elevated investment-grade (IG) new-issue volume (Figure 1): April marked a monthly record for US IG bond supply, at US$293 billion. March and April logged the highest two-month total ever, and, at US$885 billion year to date, IG new-issue supply is up 87% versus the same period in 2019.
Why the recent uptick in supply? Even amid the attraction of many scarce issuers trading at compelling credit spreads, the March 23 announcement of the US Federal Reserve’s (Fed’s) program to buy shorter-dated corporate bonds and money-market instruments helped restore investor confidence in the IG market. Indeed, the announcement marked a turning point for investor sentiment, particularly because it came at a critical juncture following a week of extreme market angst and volatility.
Then the floodgates opened: Since March 23, the volume of new issuance – in terms of the dollars raised, issuers accessing the market, and number of individual tranches – has been staggering. However, Fed intervention in the credit markets has largely enabled the supply surge to be digested in an orderly fashion and at steadily reduced risk premia.
A few statistics worth citing:
- Demand has been strong year to date, as measured by order-book oversubscription. The weekly average has been around 4.7x, although some deals have been as much as 14x oversubscribed.
- The confluence of tightening credit spreads and US Treasury yields near all-time lows is creating the opportunity for very highly rated borrowers to lock in all-time-low funding costs. Record-low coupons also recently set in 20-, 30-, and 40-year bonds as well.
- New-issue concessions (i.e., the spread premium above secondary-market levels required to sell new issues) were extremely elevated at the start of the crisis, but have fallen from a weekly average of around 54 basis points to as little as zero – and in some cases, NEGATIVE for blue-chip companies.
- New-issuance performance has been impressive: Some deals issued in mid-to-late March at the height of the credit market’s weakness, when spreads were widest and new-issue concessions most elevated, are now up as much as 32.5% (excess return). However, as spreads have rallied and concessions have collapsed, average weekly returns for the past three weeks have been nominal (-0.9% to 0.6%).
- The primary market has strengthened to the point of accommodating broader access from issuers across the ratings spectrum and sectors. For instance, BBB rated issuers now comprise 66% of weekly issuance, versus as little as 12% in mid-March. Even some of the most COVID-impacted credits have been getting access to the capital markets.
Meanwhile, primary activity in the EUR IG market also shifted gears, with sustained supply seen across corporate and financial issuers. April was also a new monthly record for IG issuance, at €81 billion. Similar to the USD IG market, greater confidence is leading to a more efficient market, with risk premia falling and greater access for a range of borrowers.
In other markets as well, we expect new-issue volumes to remain high and the need for close investor scrutiny to be great. A pick-up in high-yield, leveraged-loan, and emerging markets activity should bring with it more transactions involving issuers, countries, and sectors whose elevated risk profiles could be overlooked by some investors in the euphoria of strong market liquidity.
- To the extent that IG primary supply can be seen as an “inverse barometer” for corporate confidence, we believe supply will begin to ebb only when corporates start feeling better about the direction of the economy.
- The historic new-issue volumes seen recently further highlight the acute need for innovation (e.g., automated trading platforms) in a sector that has been manually driven for decades.