Wall Street’s debt engine has begun 2017 in record form, as companies lock in borrowing costs shortly before Donald Trump’s inauguration as the US president-elect raises hopes of a stronger economy and higher interest rates.
After this week’s record start for debt sales, activity remained brisk on Wednesday with dollar deals completed by car companies Ford and Toyota and banking groups Lloyds, Bank of Montreal and Citigroup. Earlier, Royal Bank of Canada priced a £500m sterling bond and ABN Amro issued €2.25bn of euro-denominated debt.
That followed 11 companies and banks selling $19.9bn of debt in the US on Tuesday as global financial markets reopened after the new year holiday. It marked the strongest start to a year on record, according to data from Dealogic. Global issuance totalled $21.2bn, also a record.
A modest pullback in bond yields towards the end of last month was seen helping invigorate new year activity, ahead of US employment data due on Friday and Mr Trump’s inauguration on January 20. The yield on the Moody’s BAA corporate bond index has fallen 20 basis points to 4.73 per cent from its peak in December.
“You have some pent-up demand from clients and companies looking to get out in front of the inauguration,” said Matt Brill, a portfolio manager with Invesco. “Companies still have a fear of higher rates in 2017. From that standpoint some [companies] want to front run that.”
This marks the first year since 2012 when bankers have completed any corporate bond sales in the US on the first trading day of a year, according to Dealogic data. Over the past decade, global corporate bond sales at the year’s start have averaged less than $1.1bn.
Debt issuance is typically quiet during the first few days of a trading year, as investors return from their holidays and bankers prepare for marketing calls and roadshows. That is often followed by a deluge of sales once fixed income investors decide how they are going to allocate money for the new quarter.
“Issuers are accelerating their funding plans to take advantage of what has been a very strong market backdrop,” said Dan Mead, head of Bank of America Merrill Lynch’s US investment grade debt syndicate. “It starts with the demand side of the equation. [Investors] came off a very strong performance in 2016 and came into the new year with large cash balances.”
As companies lock in borrowing costs, many analysts expect higher US government bond yields in the coming months as fiscal stimulus and tax cuts proposed by Mr Trump are put before Congress. His pledge to accelerate economic growth has already lifted bond yields and borrowing costs since his victory.
Within US fixed income, some analysts favour owning high quality credit over government debt and also paper with a short term maturity, of less than five years.
Jeanmarie Genirs, the head of Deutsche Bank’s US investment grade debt syndicate said: “When we look at 2017 we expect higher volatility.’’
Companies selling debt at the start of the week included a $5bn US dollar bond from Barclays, $3bn offering from Daimler’s US financing arm, $1.2bn sale from US package delivery company FedEx and $1bn from tractor manufacturer Deere & Co.
Offerings were dominated by banks, with sales from Santander UK, Crédit Agricole, Rabobank, BNP Paribas and Westpac accompanying the Barclays issuance. On Wednesday, Citigroup followed with $5.25bn of debt spread between three-year fixed and floating rate notes and 11-year debt that is callable in 10 years.
Lloyds issued new five and 10-year debt, while National Australia Bank sold $3.5bn of debt in three, five, and 10-year maturities.
Ms Genirs noted that financials were likely to continue to be in focus for the rest of the month, issuing debt to meet so-called total loss absorbing capital requirements.
Strategists cautioned that the surge does not signal another year of record debt issuance. Last year’s $3.6tn of new obligations is expected to remain a high watermark as higher interest rates and a dearth of multibillion-dollar mergers and acquisitions sap supply.