By Paul J. Davies
Companies have pulled back from the frenetic pace of corporate-bond issuance earlier this year, and that could support further gains for high-grade debt investors.
Markets this year have soaked up a record-breaking wave of new bond sales from companies looking to amass cash to get through the economic disruptions caused by the Covid-induced crisis and resulting coronavirus-fighting lockdowns.
So far in 2020, Europe has seen $525 billion of new debt deals and the U.S. has seen nearly $1.2 trillion, both of which outstrip full-year totals in any of the previous 10 years, according to Dealogic.
However, the market has slowed down dramatically since September, according to bankers who sell such debt. That could support a further rally in credit if investors keep putting money into the market.
"The exercise of companies hoarding liquidity is behind us and a lot of pre-financing for 2021 has been done," said Marc Baigneres, head of Western Europe, Japan & Australia investment-grade finance at JPMorgan. "If we have an orderly U.S. election, companies may continue refinancing to term-out debt," which means replacing bonds due to be repaid in the next couple of years with much longer-term debt.
"Volatility is down, spreads are tight and investors have a lot of cash, so it is a good environment for the companies who've found it harder to issue so far: smaller companies, debut issuers or those closer to noninvestment grade," he added.
This means the rest of the year is likely to see smaller deals and less overall new supply of higher-rated debt. Analysts at Goldman Sachs think that slowdown in new issuance could help corporate debt spreads to tighten a bit further so long as the economic recovery remains on track.
In the U.S., bankers say issuance is slowing while fund inflows remain healthy, meaning more money trying to find a home. Investment grade U.S. funds saw $8.7 billion of inflows in the past week, according to Bank of America Merrill Lynch. That brings the year to date total to $190 billion -- even after more than $80 billion of outflows in March.
Investors have enjoyed strong gains from a broad-based rally that has dramatically cut the extra yield over government bonds on investment-grade corporate debt -- known as the spread. This week spreads touched some of the lowest levels since before the Covid-19 crisis brought a huge spike in credit risk in March.
Some of the most favored companies, like AstraZeneca or Nestle in Europe and Honeywell International or Johnson & Johnson in the U.S., have seen their spreads drop as low or even lower than where they were before March's mayhem.
"The economic shock is profound and yet if you look at credit markets it now looks almost as if nothing has happened," said David Lloyd, head of institutional portfolio management at U.K.-based M&G PLC. "The degree of recovery in credit spreads is astonishing, some names are back to pre-March levels."
To be sure, some investors are starting to pull back from simple bets on investment-grade credit as a whole and in Europe they have begun pulling money from passive index tracking funds, like investment-grade ETFs. Those ETFs have seen outflows in recent weeks amounting to about $2 billion since mid-September, according to analysts at Barclays.
Within the funds that Mr. Lloyd manages for pension funds and other large institutions, he has reduced the generic, index-wide investments he took on after credit markets sold off and is more focused on individual companies or sectors that have been left behind in the rally.
"After the 2008 financial crisis, it took a long time for many investors to go anywhere near any kind of securitization or structured credit," he said. "It's the same now for things like pubs or airlines. But even though the outlook is bad some of these more than compensate you for the risk you're taking."
Write to Paul J. Davies at paul.davies@wsj.com
(END) Dow Jones Newswires
10-16-20 1237ET
