In US corporate bonds right now, it's an issuer's market. Apple, Microsoft, AT&T, they all supersized their recent fundraisings after finding an excess of wannabe buyers. And even lesser-known US companies are issuing debt on the cheap. For example, Snap-on, a maker of tools, sold $300 million of bonds this week and was able to slash almost 0.5% off its interest rates when demand started coming in higher than expected.
The current balance of supply and demand favours issuers, and that's why the extra yield on corporate bonds relative to treasuries has fallen to its lowest level since 2014. The average spread is 118 basis points now on the most recent data from Barclays, compared to 210 basis points a year ago. Higher interest rates are one reason for the tightening. Investors expect a Trumpian stimulus to the economy, which will prompt the Federal Reserve to raise rates, and which also ought to mean better prospects for businesses, reducing the risk of default on their bonds.
But it's the future of that balance of supply and demand that's now the top of bond trader's minds. Has the change of administration unleashed corporate animal spirits? In which case, companies will start borrowing bigly to fund growth initiatives in M&A. In that case, supply would balloon and spreads would widen again. Or will the corporate tax reforms under discussion on Capitol Hill come to fruition, in which case interest might, in many cases, stop being tax deductible for companies, and that's something that could significantly reduce the attractiveness of issuing debt. In that scenario, supply would shrivel, and red spreads would keep tightening.
Here's a couple of things to keep in mind. On the one hand, political reality suggests that tax reform will get bogged down or at least watered down, regardless of any claims from the White House, so maybe don't expect a big tax-driven shrivelling of supply anytime soon. On the other hand, the generation of executives that occupy the C-suites of American companies are seared in the experience of the financial crisis, and they're of a far more conservative bent than their predecessors. So don't expect ballooning supply, either. All of which is to say that the present balance of supply and demand may prove quite enduring, and on balance, that favours issuers. Stephen Foley for the Financial Times.