September 18, 2016
Global bond issuance is running at its fastest pace in a decade as companies, countries and US agencies such as Fannie Mae and Freddie Mac binge on debt in an era of historically low interest rates.
Almost $4.9tn of debt has been sold since the year began as issuers take advantage of rock-bottom borrowing costs, according to data from Dealogic. The previous record was seen before the financial crisis.
The sales have been propelled by central bank stimulus as policymakers seek to jump-start economic activity, including negative interest rate policies and outright bond-buying programmes under way by the Bank of Japan and the European Central Bank.
Debt sales this year are running 9 per cent ahead of the pace in 2006, when banks underwrote a record $6.6tn of debt. The figures do not include sovereign bonds sold at auction, such as UK Gilts and US Treasuries, or municipal offerings.
“The leverage increase is significant,” said Rick Rieder, BlackRock’s fixed income chief investment officer. “There is a long discussion about if this is a shift in the credit cycle. It’s something we’ve never seen before.”
Investors have rushed to hunt for income, suppressing borrowing costs for companies and countries. More than $227bn of fresh capital has flowed into bond funds this year, according to EPFR, a data provider on investment flows.
“This market has been engineered by central bank quantitative easing,” said James Shepard, co-head of investment grade debt capital markets at Mizuho. “That is the root cause of this demand for dollars. The only place to get a stable return at an incremental spread is the credit markets.”
The slide in interest rates has compelled corporate treasurers to increase debt burdens at a time when sales growth has proven elusive. Two companies, Henkel and Sanofi, sold the first negative yielding euro corporate bonds earlier this month. About $12.6tn of debt now trades with a yield below zero.
The bond sales have continued despite recent market turbulence ahead of key policy meetings from the BoJ and Federal Reserve. Investors and bankers say that will probably persist, with a multibillion-dollar bond sale from Shire expected to be launched in the coming days.
But it has come with its risks. As yields on Treasuries, Gilts and Bunds have climbed rapidly in September, prices of some of the most sought after bonds sold this summer slipped in tandem.
New 40-year bonds issued by Microsoft this August have slid nearly 7 per cent from the month’s start. Apple debt due in 2046 has declined 6 per cent. The losses have been centred in the longest-maturing debts sold with small premiums to government benchmarks.
“Companies that have very stable economic profiles are taking leverage to the highest levels they’ve had,” said Ashish Shah, AllianceBernstein’s chief investment officer of credit. “Do you have any idea what will happen in the mobile market or computing market 30 years from now? That’s the challenge.”
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