Companies rushed to borrow tens of billions of dollars this week, a sign that optimism about the economy’s outlook is beginning to take hold.
Dozens of big companies, from carmaker BMW to fast food chain McDonald’s, have issued nearly $60 billion of bonds in recent days, according to Refinitiv. The amount nearly matches the value of dollar-denominated bonds issued in all of August, and is the third-largest issuance in a single week this year.
The period after Labor Day is typically busy for bankers and traders as they return from summer vacations, but the sharp increase in bond issues in recent days has exceeded expectations, analysts said.
It’s a sign of growing confidence that companies are willing to borrow rather than manage their debt loads conservatively, and investors are willing to lend rather than sit on cash, as concerns about a potential recession ease.
“There’s no question in my mind that the economy is slowing, but there’s also no question that it’s not going into a recession,” said Andrew Brenner, head of international fixed income at National Alliance Securities. “The window for companies to borrow is still open.”
The improving sentiment in the bond market echoes the stock market’s rally this year, as investors have grown hopeful that the economy can achieve a so-called soft landing.
Despite the similarity in sentiment, a wave of bond issuance this week weighed on stocks. Bumper bond supply pushed bond prices lower, pushing yields higher. Stock prices are sensitive to increases in interest rates, such as bond yields, as this can increase costs for companies.
The S&P 500 is poised for a decline this week but is still up more than 16 percent this year.
The dollar has risen about 5 percent against the currencies of major trading partners over the past few weeks, a sharp move in that market that shows investors are moving into U.S. assets as growth in China falters. And the outlook for Europe is bleak. Europe’s benchmark Stoxx 600 index has fallen for eight consecutive days.
This week, Goldman Sachs analysts lowered their forecast probability of a recession in the United States to just 15 percent. A recent survey of investors by Bank of America showed an increase in respondents who want companies to adopt more expansive strategies, reining in costs and spending on growth rather than paying down debt.
Some analysts also attributed the increase in bond issuance this week to the possibility of borrowing costs rising further in the coming months, as the Federal Reserve considers whether to raise interest rates again. Or not. And even if the Fed leaves rates alone, a relatively strong economy also makes the chances of an eventual rate cut more distant.
This week presented a rare window without a flood of newly issued debt by the US government flooding the markets, allowing companies that needed to raise cash to be able to make deals quickly.
“I think there continues to be an overly conservative mindset out there,” said Jonny Fine, who issues investment-grade debt at Goldman Sachs, speaking about the highest-quality, most creditworthy companies. “As a result, a large number of companies want to be first in line when supply is expected to be heavy.”
Borrowing has also begun to extend to riskier, lower-rated companies, another sign of optimism among investors about the economy.
Still, credit rating downgrades and defaults accelerated in August, leading the ratings agency to raise its forecast for the share of lower-rated companies that will default on their debt in the United States next year, according to S&P Global. Up to 4.5 percent. By 3.2 percent compared to last year.
Bond yields have also risen as analysts and investors point to an impending “maturity wall,” with some borrowers closing in on the deadline to refinance low-interest bonds if they are to repay the loan in full when due. want to avoid.
“Companies have been postponing this unpleasant transition to higher borrowing costs but we are approaching this window where time is running out,” said Yuri Seliger, credit analyst at Bank of America.
Although many companies are avoiding locking in high interest rates for long periods, many recent bonds have much shorter repayment timelines than usual, allowing companies to reduce their costs if interest rates fall in the coming years. Facility is available.
“It makes sense,” Mr. Seliger said. “If interest rates are really high right now, why would I want to lock it in for 30 years?”
Source: www.nytimes.com
