Global bond sales off to a record start of $775 billion

NEW YORK – The best start to a year for bond returns is helping fuel an unprecedented debt-sale bonanza by governments and companies around the world of more than half a trillion dollars.

Global issuance of investment- and speculative-grade government and corporate bonds across currencies reached US$586 billion (S$775 billion) in the period to Jan 18, the biggest tally on record for the period, according to data compiled by Bloomberg.

From European banks to Asian corporates and developing nation sovereigns, virtually every corner of the new issue market is booming, thanks in part to a rally that has seen global bonds of all stripes surge 4.1 per cent to start the year, the best performance in data stretching back to 1999.

Borrowers looking to raise fresh financing after getting turned away for much of 2022 are suddenly encountering investors with a seemingly endless appetite for debt amid signs that inflation is cooling and central banks will call a halt to the harshest monetary tightening in a generation.

For many, fixed-income assets are looking increasingly attractive after last year’s historic rout drove yields to the highest since 2008, especially as the prospect of a slowing global economy offers the potential for further gains.

“The run-up in bond prices has legs in our view, particularly when it comes to the investment-grade markets,” said Mr Omar Slim, co-head of Asia ex-Japan fixed income at PineBridge Investments.

“Corporate fundamentals continue to be broadly solid,” he said, adding that “the sharp U-turn we are seeing in Chinese policies will provide a much-needed boost to global growth, mitigating some of the tail risks for emerging markets and providing further support”.

“This is a very good window,” said Mr Giulio Baratta, BNP Paribas’ head of investment-grade finance for debt capital markets in Europe, the Middle East and Africa. “Investors are anticipating that inflation is calming down and seeing this as a good entry point into the market, certainly in the investment-grade space, and we are seeing it in the orders and how deals are tightening.”

US investment-grade credit spreads hit their tightest in nine months this week, while in Europe, they were the lowest since May.

At 123 basis points in the United States, they are far from the highs of about 200 basis points typically seen during recessions.

Relatively high yields are a draw for investors, but some fear these will not be enough to compensate for risks as global growth sputters.

A lack of supply after this month’s flood could compress spreads even further, according to the Schwab Centre for Financial Research’s fixed-income strategist Collin Martin.

“If investment-grade spreads continue to decline and get back to that 1 per cent area, we would start to get concerned because that would just be too tight given the economic outlook,” he said in an interview.

Bloomberg Intelligence forecasts that US investment-grade bonds will return 10 per cent this year after their worst performance in half a century in 2022. This is more than double the forecast for US junk debt, as higher-quality notes often benefit more than junk when economies slow.

Emerging market and investment-grade euro-denominated credit should advance 8 per cent and 4.5 per cent respectively, according to analysts.

One of the few markets struggling to find its footing in terms of issuance is that for speculative-grade debt.

Offerings from high-yield corporate and government issuers are running at the slowest pace since 2019, with about US$24 billion priced in the period to Jan 18.

This is likely in part because junk-rated firms that had extended maturities in years past are waiting for interest rates to decline further before taking the plunge. Investor cautiousness about how those borrowers may weather a global recession is also a likely factor.

Sales of notes with a three-year tenor or less have climbed more than 80 per cent to US$138.5 billion from the same period just two years ago, after yields surged in 2022.

By contrast, issuance of bonds with maturities of 10 years or more has slipped.

“We are still quite defensively positioned, given that we have yet to see the full impact of the rate hikes on the real economy and earnings,” said Ms Pauline Chrystal, a portfolio manager at Kapstream Capital in Sydney. “However, the discussion for us has shifted from protecting the portfolio last year to a more balanced approach where we are also looking at how to participate in the market rally.” BLOOMBERG