Companies rushed to borrow tens of billions of dollars this week, in a sign that optimism about the economic outlook is starting to take hold.
Dozens of major companies, from BMW to McDonald’s, have issued nearly $60 billion in bonds in recent days, according to Refinitiv. This amount roughly matches the value of dollar-denominated bonds issued during the entire month of August, and represents the third largest issuance in a week this year.
Analysts said the post-Labour Day period is usually busy for bankers and traders when they return from summer vacation, but the sharp increase in bond issuances in recent days exceeded expectations.
It is a sign of increasing confidence that companies are willing to borrow rather than manage their debt burden conservatively, and that investors are willing to lend rather than hold cash, as concerns about a potential recession wane.
“There’s no question in my mind that the economy is slowing, but there’s also no doubt that it’s not going into recession,” said Andrew Brenner, head of international fixed income at National Securities Alliance. “The window for companies to borrow is now wide open.”
The improved sentiment in the bond market reflects the rally in the stock market this year, as investors have become increasingly optimistic that the economy can achieve a so-called soft landing.
Despite the similarities in sentiment, the same wave of bond issuance weighed on stocks this week. An ample supply of bonds pushed down bond prices, sending yields higher. Stock prices are sensitive to increases in interest rates, like bond yields, because they can raise costs for companies.
The S&P 500 was flat at the close on Friday, but is still up more than 16 percent this year.
The dollar has risen about 5% over the past few weeks against the currencies of major trading partners, a sharp move in that market, suggesting investors are piling on US assets as growth falters in China and the outlook for Europe disappoints. Europe’s benchmark Stoxx 600 has fallen for eight consecutive days.
This week, analysts at Goldman Sachs cut their forecast of a recession in the US to just 15%. A recent survey of investors by Bank of America showed an increase in the number of respondents who want companies to use more expansionary strategies, spending on growth rather than curbing costs and paying down debt.
Some analysts also attributed the surge in bond issuance this week to the possibility that borrowing costs will rise further in the coming months as the Federal Reserve considers whether to raise interest rates again. Even if the Fed leaves interest rates alone, the relatively strong economy makes the prospects of an eventual rate cut remote.
This week also presented a rare opportunity without the US government flooding the markets with newly issued debt, leaving companies that need to raise cash able to get deals done sooner rather than later.
“There is still a more conservative mindset than I think there should be,” said Jonny Fine, who manages investment-grade debt issuance at Goldman Sachs, speaking of higher-quality, more credit-worthy companies. “As a result, a large number of companies want to be first in line when supply is expected to be heavy.”
The borrowing wave has also begun to spread to riskier and lower-rated companies, another sign of optimism among investors about the economy.
However, downgrades and defaults picked up in August, according to S&P Global, prompting the ratings agency to raise its forecast for the share of downgrades that will default over the next year in the US, to 4.5 percent. Up from 3.2 percent over the previous year.
The bond rally also comes as analysts and investors point to a looming “maturity wall”, with some borrowers approaching deadlines to refinance low-interest bonds if they want to avoid having to pay off debt in full when it falls due.
“Companies have been putting off this unpleasant shift to higher borrowing costs, but we’re getting into this window where time is running out,” said Yuri Seliger, credit analyst at Bank of America.
However, a number of companies avoid fixing high interest rates for long periods, as many modern bonds carry repayment schedules that are much shorter than usual, giving companies the flexibility to reduce their costs if interest rates fall in the coming years.
It makes sense, Mr. Seliger said. “If interest rates are really high right now, why would I want to hold them for 30 years?”
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